1. We should aim for a long-term inflation rate of four or even five percent so that the Federal Reserve is much less likely to hit the "zero bound" and lose confidence in its own ability to shape the economy-wide demand picture.Bottom line: Yglesias doesn't understand supply and demand. There is never an "economy-wide demand picture" problem. Markets clear. No money printing needed. Yglesias has been sucked in by government central bank apologists. They have dished all kinds of insane theories in front of him and he has bought in without checking the framework. He has taken the nonsense to a new level with his call for long-term 5 percent inflation. Hey Matt, who gets the new helicopter money first, me or you?
2. We should make specific statutory provision for Fed injection of "helicopter money" into the economy. The metaphysics of fiscal vs monetary policy are less important than the fact that the Fed has the right institutional setup to conduct a joint fiscal-monetary action when needed. A Fed that can order money-financed payroll tax cuts that have zero impact on the deficit is never going to "run out of ammunition" in the war on demand shortfalls.
(ht John Duncan)