Many bloggers are commenting on Bernanke's response to Brad DeLong's question about whether the Fed should target three percent price inflation to stimulate aggregate demand and lower unemployment. I'll offer two points:
1. We no longer have an independent central bank in this country, at least not for the time being. There is no particular reason to think current monetary policy is Bernanke's personal decision, most of all because he is up for reappointment. He may well know better and arguably his remarks signal as such.
2. I still favor a two percent target (three would be fine too) for the rate of price inflation today. But it matters when we implement such a policy. The longer we wait, the more we miss out on its potential benefits. For instance it's easier for AD-robust market conditions to signal to employers not to lay off workers than it is for market conditions to signal that workers should be rehired. The longer we wait, the more the inflation (and its expectation) loses its potency.
Furthermore nominal wages adjust sooner or later, even if the downward ride is a bumpy one with some negative cumulative spirals along the way. I don't personally think we are close to the point where three percent is a bad target but that's a guesstimate rather than based on hard science about the state of the labor market this spring. In any case three percent will become a bad idea at some point and we need to start asking ourselves when, no matter how good an idea it was a year ago.