Greg Mankiw's Blog: What is the Fed to do?
Here is one idea. Suppose the Fed cuts the federal funds rate once again to, say, 25 basis points. More important, at the same time, the Fed announces a target path for the price level as measured by the core CPI. The price path might be, say, an increase of 2 or 3 percent per year. The Fed promises not to raise the fed funds rate over the next 12 months and, after that, will keep the funds rate at that low level as long as the price level is significantly below its target path.
The credibility of the promise is paramount. To get long-term real interest rates down, the Fed needs to convince markets that it will vigorously combat deflation, and that if deflation happens in the short run, the Fed will reverse it by subsequently producing extra inflation. A credible promise of subsequent price reversal after any deflation ensures that long-term expected inflation stays close to the inflation rate implied by the Fed's target price path. Monetary economists will recognize that this policy is price-level targeting rather than inflation targeting.
O man now here brains are saying they don’t know a monetary policy going to slap the economic bitch face hard enough lose her all senses with purple blue yellow eyes to make stop go down the hill. They are calling witchdoctor for help for praying for faith of her future. Whether go down or go up. her life muddled with services of mankind, so she must fit for her grand final, robust encountering heaven, so she begotten fertile tomorrow, that gives her motivation make her standing up her wobbling knee from her down spiral. Now look at Krugman - the Nobel gold medalist preoccupied with his paranoia his down spiral Pandora box. Slaughter if necessary sterilized if necessary chopped neck off if necessary, he says
