Blaming the Fed

I could've sworn Bryan's post was blaming the Fed for the inflation, not for failing to maintain the exchange rate. (Even though the measure he used was against the Euro, which I took to be a simple proxy for a foreign currency.)

Well, as elequently pointed out by Martin Wolf and Willem Buiter, eventually it are the central banks to blame for the rising inflation.

When you aggregate the statements made by central banks all over the world, you have to conclude that there must be interplanetary trade: the world is importing inflation.

So it is not only the fed or the bank of china to blame. But all central banks have collectively been supplying too much money. This problem is resolved if every central bank fights domestic inflation and let exchange rates float. Right? Stop the excuses.

Re "...stabilizing the exchange rate would have meant printing money like crazy, causing inflation..."

You are half right :-) I think the Fed should have increased the money supply more in 2000-2002; instead, by being too tight, they created a deflationary environment that caused the world-wide economy to tank.

Now they are too loose, and we are paying the piper in the other direction.

I would be very happy to have the Fed target inflation and let the economy take care of itself.

"The problem is that the Fed has only one instrument (intervention in the short-term money market), and in the economy there are many targets." Back in the early Thatcher years, a leading Labour politician, Denis Healey, complained that her economic policies resembled playing golf with only one club. I don't remember any suggestion by him of what other club might be available.

This post by Arnold is as surprising as contradictory. The present monetary policy framework already has two (often conflicting) goals for one instrument: guarantee full employment and 'price stability'.

Another problem that makes Bryan's position appealing lies in the definition of 'price stability'. Is it less than 2% growth in the CPI, the GDP deflator, or a broad index that includes all prices, including the purchasing power of financial assets with money? In countries where the CPI is not reliable, the only price worth paying attention is the exchange rate. After the deep methodological changes of the 90s in the CPI, is it the case of the US? Not really, but stabilization of the exchange rate is often a proxy of price stability -not, as Arnold implies, a conflicting goal.

Also, Arnold is treating capital flows as exogenous from monetary policy, but they are to a great extent influenced by monetary policy, 'liquidity conditions' (i.e. monetary conditions) and relative interest rates across countries.

In sum, Bryan's position is much more coherent than Arnold's if we follow the Tinbergen rule of 'one instrument, one goal' and if we realize that monetary policy is not too reliable as a countercyclical tool.