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RENEE MONTAGNE, host: There's a general agreement among economists that something needs to be done to get the economy moving again. At least one economist believes inflation could be the key. Many central bankers may hate the idea.

But as NPR's John Ydstie reports, a former chief economist for the International Monetary Fund argues that a moderate increase in inflation is exactly what the U.S. economy needs right now.

JOHN YDSTIE: Former IMF chief economist, Ken Rogoff, now a professor at Harvard, says the Fed's efforts to boost growth haven't worked and the central bank needs to be more forceful.

KEN ROGOFF: They need to be willing, in fact, actively pursue letting inflation rise a bit more. That would encourage consumption. It would encourage investment. It would bring housing prices into line.

YDSTIE: More inflation would push up the price of houses, meaning more people would actually have equity in their homes again. And the rising prices would bring both buyers, who've been waiting for prices to fall more; and sellers, who don't want to sell at a loss, back into the market.

In addition, Rogoff says, higher inflation would help debtors, by allowing them to pay back their debts with cheaper dollars.

ROGOFF: Now, you can say this is awful. That's like the '70s, it was terrible, and many people have said that. But, you know what? We need, still, to be worried about the 1930s.

YDSTIE: And make sure we don't end up in that kind of long term, crushing slump. Rogoff says the Fed should announce that it will essentially print money until inflation rises to around five percent a year. A few years ago, Rogoff says, this was the prescription one very prominent economist suggested that Japan use to get out of its deep economic funk.

ROGOFF: When, Ben Bernanke, as a Fed Governor, went to Japan seven years ago, that's what he told them to do. I think it's the right recipe for the United States.

YDSTIE: During a speech in Tokyo in 2003, Bernanke said, I think the Bank of Japan should consider a policy of re-inflation. He went on to say, one benefit would be that it would ease some of the pressure on debtors and the financial system generally.

Stanford economist John Taylor, a former Treasury official under President George W. Bush, thinks re-inflation is not a good idea for the U.S. He says Bernanke offered that prescription for Japan because it was facing dangerous deflation in its economy, while prices here in the U.S. are still rising, at a rate of about two percent a year, excluding volatile food and energy prices.

JOHN TAYLOR: The idea that you could temporarily have some high inflation and deal with these problems, is, really, wishful thinking.

YDSTIE: Taylor says encouraging inflation is a slippery slope. A central bank may just want to raise inflation moderately, he says, but inevitably it gets translated into higher inflation for longer periods. That's partly because pushing inflation down can cause economic pain, so people resist it.

TAYLOR: That happened in the seventies. Every time the Fed tried to reduce inflation, there was huge clamoring for the harm that would cause the economy. And it took many times – finally, Paul Volcker, with extra-ordinary courage and skill - was able to bring that inflation down.

YDSTIE: Former Fed chairman Paul Volcker expressed his opposition to boosting inflation in a recent op-ed piece. Among his concerns: the effects on foreign countries who own trillions of dollars in U.S. debt. They would see the value of that debt eroded by higher U.S. inflation. John Taylor agrees that's a problem.

TAYLOR: The idea of inflating ourselves out of our debt, the government debt, in particular, raises huge credibility problems.

YDSTIE: Ken Rogoff argues that fears the Fed could not get inflation back to desired levels after allowing it to rise a few percentage points, are over-blown. But it's not a painless solution, he says

ROGOFF: I don't want to sound like this is a panacea, but it's certainly not something to be afraid of, it's not the major problem.

YDSTIE: The major problem is an outcome that looks more like the 1930's or Japan's lost decade. There are no easy solutions, Rogoff says. We're faced with picking our poison. A temporary round of higher inflation, he argues, is the least worst option.

John Ydstie, NPR News, Washington.

LYNN NEARY, host: Yet another wrinkle in the global economic picture, Moody's Investor Service has downgraded the credit ratings of a dozen British banks today. Among those downgraded, is one government controlled bank, the Royal Bank of Scotland. It had its credit rating lowered by two notches.

Lloyd's TSB Bank, which is partly controlled by the British government saw its rating drop a notch. The rating agency also announced the downgrade of nine Portuguese banks.

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