Where Have All the Inflation Targetings Gone?

Once upon a time, some economists in Japan argued that the inflation targeting was the "global standard" of economics and that economists who didn't adopt it "don't know economics" because prominent economists such as Bernanke and Stiglitz advocated inflation targeting. Their bible was Krugman's article titled "IT’S BAAACK!" written in 1998.

Now Krugman has officially withdrawn it:

I and others tried to make for Japan in the 90s and are trying to make again now: creating inflation is easy if you’re an irresponsible country. It may not be easy at all if you aren't. [...] No matter how much Japan increases the monetary base now, expectations of future money supplies won’t move if people believe that the Bank of Japan will move to stabilize the price level as soon as the economy recovers.

And Stiglitz says "Today, inflation targeting is being put to the test – and it will almost certainly fail." Bernanke, who once criticized the policy of the Bank of Japan (BoJ) as "extremely poor", doesn't even mention it when he can adopt it if he wish.

In fact, Krugman's proposal was different from the inflation targeting as price-stabilization targeting adopted in some European countries. He recommended the BoJ to promise to be irresponsible to change expectation. Since people don't expect inflation when they see deflation, the BoJ should commit flooding money indefinitely to make inflation of 4 percent for 15 years.

Krugman might have joked, as the paper's title suggested. Indeed such a proposal can be nothing but a joke. Who believes the BoJ's promise to be irresponsible? If inflation became 4 percent, it is rational for the BoJ to break the promise, so such a promise can't be subgame perfect, in terms of game theory.

His theory was not only wrong but harmful because it pushed the BoJ to continue unorthodox monetary policies such as zero-interest rate and "quantitative easing" too long. These policies induced yen-carry trades that amounted to one trillion dollars, which accelerated the American housing bubble that caused the current financial crisis.

Anyway, Krugman backed off. But the Japanese economists who embraced his theory keep silent, probably because it would overturn their credibility (if any). It was the most shameful economic controversy in Japan, for which Krugaman is partly responsible. I recommend him to delete his wrong article and apologize to Japanese people with his followers.