Evans Advocates a Price Level Target

President of the Federal Reserve of Chicago Charles Evans came out for a price level target this weekend in Boston. The Financial Times reports:

Speaking in Boston on Saturday, [Evans] said the Fed should consider using a temporary target for the level of prices instead of the rate of inflation in order to drag the economy out the trap by convincing businesses and consumers to stop saving and start investing and ­spending.

Such a move would be in addition to a fresh asset purchase programme, or quantitative easing, now under consideration.

“I think there are special circumstances when price-level targeting would be a helpful complement to our current and prospective strategies,” Mr Evans said.

[...]

In the price targeting that Mr Evans described, the Fed would promise to generate enough extra inflation to make the price level the same as if prices had risen by 2 per cent a year since December 2007, which was the peak of the last business cycle according to the National Bureau of Economic Research. As soon as the Fed reached that goal it would abandon the price level target and go back to targeting inflation of about 2 per cent a year.

As I have said before, I would favor a target for the level of nominal income, but a price level target will suffice. Also, it seems like the Fed’s implicit inflation target is growing more explicit by the day. Might we see an explicit target once the economy recovers?

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