Larry Summers Should Not Be Critical of Price-Level Targeting that Allows Inflation Above Target If It has been Below Target for a While →

If a central bank makes the mistake of avoiding negative interest rates, one of the next best ways to try to ensure enough aggregate demand is to raise expectations of future inflation by promising “catch-up” inflation to get the price level back onto its targeted track. Larry Summers has said some positive things about negative interest rate policy in the past. (See “Peter Sands and Larry Summers Say Deep Negative Interest Rates Are Feasible from a Technical Point of View” and ) But unless he is headed toward being more vocal in support of negative interest rate policy, it could be harmful to the economy for Larry Summers to be speaking against the catch-up inflation in price-level targeting.

To learn more about negative interest policy, see my bibliographic post “How and Why to Eliminate the Zero Lower Bound: A Reader’s Guide.”