Embracing inflation cont'd
Ken Rogoff is right to suggest that a couple years of higher inflation would help the economy, writes Paul Krugman, but how exactly are we going to get that inflation? The Fed's got a few tricks left in its toolbelt, but it's not clear how well they'll work. And while Rogoff is dismissing the role of further fiscal stimulus in helping the economy, the only time we've gotten inflation going during a slump like this one was after the Great Depression -- and we did it, yep, with fiscal policy. Quoth Krugman:
Here’s the GDP deflator (a measure of the overall price of things America produces) from 1929 to 1948:
Prices rose about 70 percent during the buildup to war, the war itself, and the immediate aftermath. This greatly reduced the real value of outstanding debt– the reverse of the debt deflation that took place in the early stages of the depression.
What this example suggests is that yes, inflation can be helpful in getting out of a prolonged slump — but that getting that inflation probably requires a combination of loose monetary policy with strong fiscal stimulus.
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