The boffins at BERL were buoyant, when senior IMF researchers published their assessment of world macroeconomic policy over the past 20 years and found it wanting. An obsession with achieving low inflation using policy interest rates - the researchers reckoned - may well have caused the crisis and certainly has made overcoming it more difficult. They suggest inflation targets could be raised from a standard 2% to 4%. BERL has been making the same point for 20 years, calling for better balanced policies and (two years ago) recommending a benefit-cost analysis of the operation of monetary policy over the past two decades be undertaken. Bingo.

Labour In Support. The IMF paper asks whether the net costs of inflation are greater at, say, 4% than at 2% and questions whether the potential benefits are outweighed by the costs. BERL has been criticised for being unorthodox; the IMF is the great champion of orthodoxy. Yet the IMF researchers are echoing BERL’s view policymakers should watch many targets and have many more instruments at their disposal than, alas, they were using before the crisis. Labour leader Phil Goff, too, is heartened by the IMF ideas about raising inflation targets, saying this reinforces his party’s decision to challenge existing monetary policy. The Govt, however, is not persuaded it should reconsider abandoning its inflation target. Plenty of work is going on in respect of macro-prudential policy settings and the hoary issue of how you can control credit to avoid a housing bubble and its inevitable bursting.

Question Of Credibility. But the Govt questions what more inflation would do to the economies of countries like the US and Britain and - more particularly - those teetering on the brink of insolvency. Can (and should) they inflate their way out of debt? The Economist magazine is similarly sceptical. It notes many studies suggest inflation of 4% would do little, if any, harm to economic growth, but others reckon the threshold at which distortions kick in is lower. And since higher inflation tends to mean more volatile prices, the risks increase as the target rate rises. But a bigger objection is the damage a policy shift would do to the stabilisation of public expectations about inflation. How could central bankers convince investors a policy shift was intended to make policy more flexible, rather than to inflate away the state’s debts? “With their credibility undermined, the next crisis would be much harder to fight.”

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