My new Bloomberg Viewcolumn examines some recent arguments for higher inflation.
[The] reasoning is that faster inflation today is a way to reduce real interest rates when nominal rates, being roughly zero, can’t fall. Faster inflation should also spur spending on both consumption and investment because it raises the price of just leaving money idle. These effects would stimulate the economy in the short run.
The advantage of a permanently higher inflation rate is that it would raise nominal interest rates: If you expect higher inflation, you’ll want to charge a higher interest rate to compensate for it. So in future recessions, the Fed will have more room to reduce interest rates before hitting zero.
I go on to explain why I disagree with these arguments.