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Inflation targeting aims to create certainty in people's
minds about what inflation should be, by increasing
interest rates when inflation is rising, and decreasing
them when it is falling.
Even more certainty could be created by reducing the
number of possible interest rates to two: the low
interest
rate applies when inflation is on target, and the high rate
applies when it is higher than the target.
More certainty's got to be a good thing, right?
Wikipedia: Inflation targeting
http://en.wikipedia...Inflation_targeting
[jutta, Nov 27 2008]
[link]
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//More certainty's got to be a good thing, right?// |
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Inflation is caused by lending, most of which is long term stuff like mortgages. It takes years for an adjustment in interest rates to make much difference to inflation. It has been described as like steering an ocean liner by sticking one oar over the side. It is even more difficult than that, as at least you can tell exactly when a ship is pointing the right way, whereas it is hard to measure inflation precisely. |
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This means it is best done by highly experienced economists. They have to guess the right rate far in advance of its effect on inflation. Being limited to two arbitrary rates would just make it harder for no real reason. |
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(-) The difference between your scheme and the current practice is more than just lower resolution. You're mapping a relative change (lowering and raising interest rates) to an absolute change (low vs. high) - once the central bank has lowered the interest rate once in your scheme, it's out of options. |
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Rate options of 0% and 1000% would solve that problem. Steering an ocean liner with either full rudder port or full rudder starboard. |
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Nobody would borrow at 1000%. Nobody is borrowing now, but for a different reason: nobody wants to lend. |
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Either way, it wouldn't help. |
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