Robert Samuelson had a serious discussion of Paul Krugman's idea (and in his professor days, Ben Bernanke's) that the Fed could boost demand by deliberately targeting a higher rate of inflation. The idea is that this would lead to a lower real interest rate.
If businesses expected inflation to be 4.0 percent over the next five years, rather than 2.0 percent, it would give them more incentive to invest. They would be able to sell everything for 20 percent more money in five years. Higher inflation would also erode the debt burden of homeowners and others with large debts. This could free up additional money for consumption.
While Samuelson acknowledges the potential benefits from higher inflation in boosting growth he still opposes the policy. He cites Bernanke's own objection as Fed chair, that it could undermine the inflation-fighting credibility of the Fed in the future. He also adds his own objections:
1) wages might not keep pace with inflation, dampening purchasing power;
2) higher inflation may lead consumers to become fearful and therefore save rather than consume;
3) financial markets might over-react and demand higher real interest rates. Read more......