Wednesday, 25 November 2015

Why not inflate?

John Cochrane and Noah Smith debate whether a bit of inflation would be a good idea for Japan.

As an observer with a poor grasp of macro, my suspicion is that inflation sometimes happens because it is a socially optimal (read: least painful) way to deal with past debts. I suspect it will happen to the Eurozone at some point too. But an awful lot of institutional and ideological scaffolding will first have to be dismantled. Interesting.

One question I'm unsure about is whether expected inflation does the job of deflating debts. I assume it does for e.g. social security transfers, but not for inflation-proofed debt or short-term debt which has to be rolled over. I don't know how much this vitiates the argument for inflation as a "soft default".