Subject: Re: OT Fed/Macro/Rates
Why? The 2% target taken by the Fed (and a number of other central banks) is chosen because they think it best serves the long run stability and prosperity of an economy. It's arrived at by starting with price stability, but then adding just enough slippage to help with the real problems caused by nominal price stickiness.

I've read that the reason the Fed continues to expand the money supply in not only bad times but also good, aiming to keep the economy in a state of slowly rising prices, is because deflation is seen as enemy #1. And the deflationary spiral that can occur in severe recessions, like the Great Depression, does seem like a dreadful thing worth avoiding.

But what's less clear to me is why fighting deflation in a healthy, growing economy is beneficial. It's been said that normal deflation in a healthy economy would discourage spending on goods, as people may choose to wait for prices to drop further to spend. But part of me wonders how bad a thing that would be, especially today given the incredibly low savings rate we have in the US. And presumably, a good chunk of money not spent would likely be put to work through investments rather than sitting under a mattress idle.

Is anyone aware of an example/case study of a country that did not expand their money supply at all during healthy economic times except to step in to stave off deflationary spirals during severe recessions? I'd love to read about it.