Roberto Rigobon, professor at the MIT Sloan School of Management, has coined the Britney Spears Theorem of inflation. Read why it matters for securities finance.
According to a recent interview posted in MIT News, Rigobon comments on the argument that the Fed should move from 2% target inflation to 4%.
“There are two ways of getting 4 percent inflation. One is saying you want to deliver 4 percent. Another is saying you are protecting against inflation, but that suddenly we have 4 percent. And you say, “Oops, I did it again.” That’s the Britney Spears part. It’s way more effective to say your long-term goal is 2 percent. If I change the long-term target to 4 percent, it might affect bond prices and expectations. I want bond markets to know it’s going to be 2 percent in the long term, but it won’t be 2 percent next month, and in the short run, because we’re going through this process, so I will allow it to get higher. If that means 4 percent for six months, or 3 percent for nine months, nobody knows for sure. But I think everybody who is not too attached to ideology will agree with Olivier that it would be healthy to free that target. I mean, in Europe, it’s 1 percent. You have to be kidding me. Now it’s very interesting, because the Germans have an objective of 1 percent, and they have had 2 percent inflation for six months. So they are doing the Britney Spears thing. In Britain the target is 2 percent, and since February the rate has been 4 percent.”
How inflation is managed has significant implications for the world of securities finance. Inflation and interest rate watchers should keep a close eye out for the Britney Spears Theorem in action.