IMF rethinks its policy on inflation rates

In separate interviews, three former IMF chief economists said the recommendations were significant but raised questions about the feasibility of carrying them out in today’s situation.

Raghuram G. Rajan, of the University of Chicago’s Booth School of Business, said the IMF’s suggestion for allowing higher inflation might not be well-received.

“With bond markets worried that governments may inflate their way out of their debt obligations, this is probably not a good time for central banks to start debating their inflation targets,” he said. Rajan said he was concerned that the nuances regarding capital controls would be overlooked. “The pressure within emerging markets to set up capital controls, with many countries not meeting the careful conditions laid out by the fund’s paper, will increase,” he predicted.

Kenneth S. Rogoff of Harvard noted that he had urged that the Fed and the European Central Bank consider slightly higher inflation targets after the 2001 recession in the United States.

But he added: “Having spent the past two decades convincing the public that two per cent inflation was magical, it might be both difficult and confusing for central banks to suddenly announce they have changed their minds.”

He said Ostry’s report was only the latest step in the IMF reassessment of its “dogma on capital controls” that began with the Asian financial crisis in the late 1990s.

“Today, it is patently obvious that the US and Europe’s near-zero-policy interest rates are fuelling a surge of international capital into Asia and Latin America that will end in tears if not properly managed.”

Simon Johnson, of the MIT Sloan School of Management, said it would be “a very hard sell” to persuade central banks to raise their inflation targets “just because the financial sector is badly run and hard to reform.”

But he praised the emphasis on regulation.

“The IMF is trying to redefine what is and what is not responsible financial policy after the crisis,” he said. “They are commendably aware of the need for greater regulation and the ways to synchronize that around the world.”