Monday, August 30, 2010

The problem with inflation targeting

Banks to not directly produce inflation,  the firm or household has to participate by holding money balances greater than goods balances. Hence, there is no direct inflation 'quant' that banks can produce along the their distribution system.
Bakers could use a seigniorage system in which banks along the chain are paid a percentage of gross loan flow with printed money. That becomes NGDP targeting.  Seigniorage is a quantity in which banks can measure both level and variance, giving them the internal signal they need to balance expansion or contraction of the network.  When seigniorage is the main source of bank profits, then the path to money growth is via bank shares.

Target the ratio of consumer to producer inflation targets the yield curve directly, removing money variances.   However, we know what the maximum entropy yield curves look like.  At least they look that way with infinite precision, so Central Banker does have a method to target the yield curve shape.

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