VOLCKER ON THE DANGERS OF TRYING FOR TOO MUCH PRECISION IN ECONOMIC POLICY.

Paul Volcker was chairman of the US Federal Reserve Bank from 1979 to 1987 — and a very successful chairman. Volcker had an article on federal reserve policy on the Bloomberg site (October 24, 2018) that is well summarized by its headlines:

“WHAT’S WRONG WITH THE 2 PERCENT INFLATION TARGET?
False Precision can Lead to Dangerous Policies.”

Volcker’s concern is that central bankers are placing a precision on economic goals that is inappropriate.

Volcker begins with the question: “How do you define price stability?” and then gives what he believes is the correct answer to the question: “That state in which expected changes in the general price level do not effectively alter business or household decisions.”

That principle, Volcker says, is now being replaced with a precise answer: 2 per cent. Volcker objects to using a precise number. He says: “No price index can capture, down to a tenth or a quarter of a percent, the real change in consumer prices….The fact is, even if it would be desirable, the tools of monetary and fiscal policy simply don’t permit that degree of precision.”

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