If Only Bernanke Had Volcker's FOMC

Former FOMC president Volcker, like Bernanke, is overly reliant on  the creditism view of monetary policy.  Take this past week's comments at the Atlantic magazine news conference.

Higher inflation would backfire by causing interest rates to rise. "You are not going to get any stimulus and you are going to make it much harder to restore price stability,"

Volcker is implying that the higher interest rates that would accompany a higher inflation target would be contractionary.   At first glance, his analysis appears correct, a higher interest rate would seem to suppress already weak aggregate demand.  Yet with today's current low levels of inflation and interest rates at their lower bound, a higher interest rate stemming from a higher inflation target would be a by product of an improved economic outlook.  To understand why this counter intuitive conclusion is correct, we need to look at David Glasner's recent research on deflationary expectations at the zero lower bound, my bold:

What's Wrong with Increasing (NGDP) Expectations?

This notion that we must have 2 percent inflation or the world collapses needs to end.  First let's look how the US fared coming out of the 1980-1982 recession.  Note that NGDP stayed right around 4 percent throughout the recession, until 1982 when the fed opened up the spigot and allowed NGDP growth to expanded to 12%.  As you can see from the graph, inflation expectations remained well anchored throughout the whole expansion process, most likely do to the excess capacity and high unemployment.

Could you imagine how badly people would scream of runaway inflation if NGDP growth was at 12% today?!...  Now let's compare and contrast with 2007-2011. 

10 year inflation expectations as released by the Cleveland Fed last month are 1.42 annualized.  I’m guessing GDP this year and next is right around there.