>>1786
Sakurai: Do you think the BOJ should change the inflation target?
Sims: Well there’s some discussion about whether a higher inflation target would be better. That argument is that if unexpected developments can more easily push you back to the zero lower bound, or deflation, if you have been targeting 2% than if you’ve been targeting 4%.I think there’s something to that argument. There is 4% inflation starts to get to be a level at which people have to worry about it and think about it. And I think there’s lots of benefits to keeping inflation so low that people just don’t pay any attention to it. So, I think that’s a difficult argument, whether a higher inflation target or the current one is better. Now there’re other people who say “We can’t make the 2% our target, so let’s have our target as 1%”. Move the goalposts. And I think that’s actually a big mistake. Because you’ve shown you couldn’t hit your target, why should people believe that this new target is anymore something that you can attain and maintain than the old target was. I think that once you’ve set a target, you should meet it. And that probably with going to a 4% target, now as people have seen that you can't hit a 2% target, why should they believe that you’d be able to hit a 4% target even if you try?
Sakurai: Many worry about Japan becoming the second Greece with a debt-to-GDP ratio of over 200%.Can Japan afford to postpone a consumption tax hike, and increase fiscal spending?
Sims: One big difference between Greece and Japan, and the reason Japan can still have zero-interest rates, whereas Greece pays high interest rates, is that Japan’s debt is almost entirely Yen-denominated debt. The government can print Yen. So a government that can print the money it promises to deliver in its debt, never needs to default. It can always pay what it’s promised to pay, because it’s only promising to pay paper. Greece has Euro debt and Greece cannot print Euros. So Greece, if it can’t make the promised payments, has no choice but to default in some form or other, and they’ve already defaulted, they’re going to default again, they 're going to revalue the debt. So I think the short answer is Japan is actually very different from Greece, even though the ratio of debt-to-GDP is not so different.
Sakurai: Some have pointed out that your ideas are similar to Helicopter Money. What’s the difference?
Sims: Helicopter Money there’s actually several kinds of proposals for it. The name comes from a proposal of Milton Friedman that if you wanted to stimulate inflation you could have the central bank hire a bunch of helicopters and sprinkle money over the countryside. But modern central banks cannot do this. Modern central banks, they’re ordinarily constrained to do open market operations. They buy government debt and sell it trying to control interest rates. They’re not allowed to give gifts of money to people. That’s a fiscal transfer. And in most rich countries, maybe all of them, the central bank is legally bound not to do that. So the proposals that are called Helicopter Money are all proposals that actually do a fiscal expansion, and try to make it appear as much as possible like a monetary policy action.
