Rogoff: Central Banks will Eventually ... be Driven to Tolerate Higher Inflation

Ken Rogoff:

...many (if not necessarily all) central banks will eventually figure out how to generate higher inflation expectations. They will be driven to tolerate higher inflation as a means of forcing investors into real assets, to accelerate deleveraging, and as a mechanism for facilitating downward adjustment in real wages and home prices.

It is nonsense to argue that central banks are impotent and completely unable to raise inflation expectations, no matter how hard they try. In the extreme, governments can appoint central bank leaders who have a long-standing record of stating a tolerance for moderate inflation – an exact parallel to the idea of appointing “conservative” central bankers as a means of combating high inflation.

But Bernanke did have this reputation, at least among some on the right, e.g. John Tamney in the NRO when Bernanke's name came up as a possible successor to Greenspan:

a June New York Times article noted Bernanke’s belief that the gold standard made the Great Depression worse. Plus, in a 2002 speech, he lauded the ability of the government to use the printing press to “generate higher spending and hence positive inflation.” If his adherence to a Phillips Curve orthodoxy made his belief in a price-rule already seem shaky, his direct comments about money should remove all doubt. ... For his views on money, Bernanke has the potential to be very dangerous.

Despite his reputation among the Tamney types, I think Bernanke favors more aggressive policy, but he hasn't been unable to sway others on the committee that further easing is needed. But maybe that gives him too much credit, or credit for a view he doesn't really hold. If Bernanke does believe the Fed should do more, he's kept it pretty well hidden lately and it would be nice to see more leadership from the Fed Chair.

As for Rogoff's claim that "central banks will eventually ... be driven to tolerate higher inflation," I am not as convinced of this as he is where the Fed is concerened. The argument for tolerating higher inflation is strong already, yet the Fed hasn't acted yet, and it appears to be looking for excuses not to act in the future (and some members of the Fed want to raise interest rates now to head off the possibility of future inflation). It's easy to imagine the Fed fighting inflation no matter what, or at least having policy gridlocked by the inflation hawks, and arguing that in doing so it is helping rather than hurting the recovery.