Sunday, March 09, 2008

An Answer to Greg Mankiw's Question?

by Ken Houghton

Thomas Sargent's speech at the AEA this year was All About the Glories of Inflation Targeting.

We will leave aside for the moment whether or not inflation targeting is a good thing for a democratic society. (That I phrase the question in that form tells you the answer to which I'm inclined, I suppose, but I can be convinced.) Instead, N. Gregory Mankiw yesterday asked Whatever Happened to Inflation Targeting? , which we have to concede would be a fair question, given Fed statements.

I leave it to the Thoma/Duy (who have started related discussions here [Duy] and here [Thoma]) and Hamilton/Chinn discussants to try to answer Mankiw's question directly.

Indirectly, though, I followed Mankiw's link to the Cleveland Fed, who post this graphic on Household Inflation Expectations, based on University of Michigan Consumer Survey (gated entry here).

So, if we were asked what has happened, the clear answer from the public would be "nothing." The target may be off, but the expectations appear to have been mostly in the same range since (at least) the end of 2006. It is just that the adjusted TIPS rate is (finally?) approaching those expectations.

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