Krugman’s blog, 8/27/16

There was one post yesterday, “On Fed Complacency:”

Is the Fed really repeating its big mistake of the pre-crisis era, dismissing concerns about its ability to respond to recession? Jared Bernstein thinks so, and so do I.

As Jared notes, the current state of thinking seems to be reflected by a paper by David Reifschneider, which argues basically that by the time the next recession arrives, the Fed funds rate will have returned to a level that still leaves sufficient room to cut. This argument is made carefully and systematically; but as Jared says, if the argument is wrong in any of several plausible ways — say, if the natural rate of interest is now much lower than it was in the past — this could be very wrong.

And I can’t help but recall a 1999 paper by Reifschneider and John Williams about inflation targets and the risk of hitting the zero lower bound. They concluded that a 2 percent target should be enough to make this a minor concern — the zero bound would probably be binding only 5 percent of the time, and ZLB episodes would last on average only 4 quarters:

In fact, we have just gone through an 8-year — 32 quarter — ZLB episode, which accounts for more a quarter of the time that has passed since the beginning of the Great Moderation. Basically, that optimistic take was off by an order of magnitude. Shouldn’t that miss give the Fed pause now?

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