Recessions are not unusual, but the extent to which the origins of the current crisis are financial is. We must therefore consider whether unusual financial solutions are required. The global economy would benefit from a pre-announced, temporary, globally co-ordinated bout of moderate inflation.

Since it takes about two years for central-bank policy fully to influence inflation, a sensible policy would be to target 4 per cent inflation for the five years from 2011, followed by 2 per cent thereafter. In Britain, the government would simply redefine the Bank of England’s inflation target. At central banks with theoretically greater independence – the US Federal Reserve and the European Central Bank – Ben Bernanke’s term as Fed chairman is up for renewal in 2010 and Jean-Claude Trichet’s term as ECB president ends in 2011. Global co-ordination between the central banks should, therefore, be possible, limiting the impact on exchange rates from a decision to take unilateral action. An increase in inflation by an extra 2 percentage points for a period of five years would have many benefits – for governments, companies, households and the banking system.