Axel Leijonhufvud is perhaps one of the most insightful and poignant economists of the twentieth century — not to mention the authority of John Maynard Keynes (ed. note — and what Keynes should have said?). He always seems to be a bit ahead of the curve in terms of mainstream macroeconomic thought. Thus, when he writes, I eagerly read. His latest piece over at VoxEU tackles inflation-targeting and central bank independence. Here is a sample:
This strategy failed in the United States. The Federal Reserve lowered the federal funds rate drastically in an effort to counter the effects of the dot.com crash. In this, the Fed was successful. But it then maintained the rate at an extremely low level because inflation, measured by various variants of the CPI, stayed low and constant. In an inflation targeting regime this is taken to be feedback confirming that the interest rate is “right”. In the present instance, however, US consumer goods prices were being stabilised by competition from imports and the exchange rate policies of the countries of origin of those imports. American monetary policy was far too easy and led to the build-up of a serious asset price bubble, mainly in real estate, and an associated general deterioration in the quality of credit. The problems we now face are in large part due to this policy failure.
I have come around to this view in recent months (although I favor something more like this). I cannot, however, support his view on ridding ourselves of the idea of central bank independence. The prospects for efficient policy are bleak.