Robert M. La Follette School of Public Affairs
Friday, August 10, 2012

Economists back inflation to boost economy

Available online

"Trends: Better Living Through Inflation," third quarter 2012, Milken Institute Review

"The idea that inflation might be our friend is gaining traction," July 25, 2012, Los Angeles Times

Chinn's Econbrowser post: "The Path Not Taken ... Thus Far: Debt Deleveraging by Inflation," July 23, 2012

"Number of the Week: Could Inflation Revive the Recovery?," July 21, 2012, Wall Street Journal

"How to Save the Global Economy: Whip Up Inflation. Now.," by Chinn and Frieden, January-February 2012, Foreign Policy

Inflation is the best bet for beating the debt crisis and helping the global economy recover, La Follette School economist Menzie Chinn and co-author Jeffry Frieden argue in "Trends: Better Living Through Inflation" in the Milken Institute Review.

"Debtors — households, business and governments — find servicing their loans easier as prices and wages rise," Chinn says. "Once the real burden is reduced, borrowers can resume their regular economic behavior, which will stimulate investment and consumption."

Noting that inflation is very low at the moment, Chinn and Frieden suggest inflation at a rate of 4 to 6 percent for several years. One option would be for the Federal Reserve to tie inflation to the unemployment rate

Waiting for politicians to enact other policies could lead to a decade of lost economic growth, say Chinn and Frieden, who teaches at Harvard University. "To beat the 10-year sentence, banks and other financial intermediaries need to get back to the business of channeling savings to productive projects. Households and firms need to go back to a more balanced mix of saving and spending that supports growth and full employment."