DP: Pretty recently, some economists have suggested that the central bankers took [the threat of] inflation too seriously.
PV: I’ll give you a simple answer. The responsibility of any central bank is price stability. I was at the helm at that time. Price stability is two percent inflation, which we can’t closely control anyway. They ought to make sure that they are making policies that are convincing to the public and to the markets that they’re not going to tolerate inflation.
DP: And does high inflation matter as long as it’s expected?
PV: It sure does, if the market’s stable. And if it is expected, then everyone adjusts, and it doesn’t do you any good. The responsibility of the government is to have a stable currency. This kind of stuff that you’re being taught at Princeton disturbs me. Your teachers must be telling you that if you’ve got expected inflation, then everybody adjusts and then it’s OK. Is that what they’re telling you? Where did the question come from?
DP: Okay. And to get back to the central banking a little bit, given the trade-off between inflation and unemployment –
PV: I don’t believe that. That’s my answer to that question. That is a scenario and a delusion, which economists have gotten Nobel Prizes twenty years ago to disprove.
[H/T Zero Hedge]