FOLKS who have a vivid recollection of the Great Inflation of the 1970s must wonder why anyone would wish even a trace of that upon future generations. Yet that seems to be the risk some economists are willing to take.
The idea that the Federal Reserve could "fix" things faster with a bit more inflation keeps popping up in academic circles, which is probably where it should remain.
In December 2008, as the financial crisis started to claim its victims, Harvard University economist Kenneth Rogoff teed up the "inflation option" as one of many to be used by policy makers.
Pretty soon, Harvard colleague Greg Mankiw was advocating higher inflation as a cure for slow growth - and a preferable option to additional fiscal stimulus.
In 2010, Olivier Blanchard, chief economist at the International Monetary Fund, put his imprimatur on the idea.
In a paper examining the lessons from the financial crisis, Blanchard and his co-authors suggested that the benefits of a 4 percent inflation target, to minimize the risk of deflation in response to shocks, might outweigh the costs.
Let's leave aside for the moment the punishing effect higher inflation has on savers, whose investments are paid back in devalued dollars. I needed to understand the mechanics of what seems like a wacky, and unworkable, idea. So I posed some questions to Rogoff.
He said in an email that if the Federal Reserve - or any central bank - were to raise its inflation target, that would lift inflation expectations and reduce short- and intermediate-term real rates.
(The real rate is the nominal rate minus expected inflation, which nowadays can be inferred from the spread between nominal and inflation-indexed bonds.)
In theory, this wouldn't affect real long-term rates, Rogoff said. In practice, I'm not so sure.
Rogoff doesn't like Blanchard's idea of adopting a permanent 4 percent inflation target. He said a "short burst of moderate inflation" - two years of 6 percent inflation - would speed the deleveraging process.
The operative words in that policy recommendation are "short burst" and "moderate inflation."
For all its concerted effort - almost five years of zero-percent interest rates, large-scale asset purchases and forward guidance - the Fed can't even hit its 2 percent target from below. I'm not saying the current 1.3 percent inflation rate is an alarming development that needs to be addressed.
I'm just wondering how an institution is going be successful targeting something - inflation - that is determined by today's monetary policy with "long and variable lags" (see Milton Friedman). A "short burst" could be prolonged. "Moderate inflation" might be anything but. And inflation expectations might take on a life of their own.
If a 6 percent inflation target would accelerate the deleveraging process, why stop there? Why not 8 percent? Or 10 percent? Wouldn't that speed the process?
You get the point.