Inflation target

The concept of an inflation target, particularly the 2% target, is a heavily debated topic among economists and policymakers. Here are some key insights from various experts:

1. Historical Perspective:

   • Paul Krugman mentions that the 2% target originated with New Zealand's central bank and was established as a compromise between factions wanting price stability and those concerned about the zero lower bound during recessions. He argues that this target was based on economic modeling from the late 1990s, which has proven outdated as it didn't foresee prolonged low-interest periods like post-2008 financial crisis 1.

2. Current Economic Context:

   • Tim Duy suggests that aiming for a higher inflation target, such as 3%, might be more appropriate given the proximity to the lower bound and the current economic circumstances. However, he acknowledges the political difficulty of changing the target from 2% to a higher number 2.

3. Practical Challenges:

   • Greg Davis discusses the difficulty central banks faced in achieving the 2% target in the past and highlights that while fiscal and monetary conditions have changed, maintaining this target adds credibility over time. Changing the target while economic conditions fluctuate significantly would not be prudent 3.
     
     1
     Inflation Target Debate
     00:27:17
     
     2
     Inflation Targeting Debate
     00:32:58
     
     3
     Inflation Targeting Debate
     00:52:08
     
     4
     Inflation Targeting
     00:17:26
     
     5
     Rethinking Inflation Targeting
     00:40:19

4. Alternative Approaches:

   • Neel Kashkari emphasizes not raising rates prematurely and suggests focusing closely on actually achieving the 2% target before considering rate hikes. He also notes the importance of forward guidance tied directly to achieving the inflation target rather than adjusting it 4.

5. Conceptual Critique:

   • Edward Chancellor criticizes the narrow focus on inflation targeting, arguing it overlooks natural deflationary periods due to productivity growth and beneficial supply shocks. He warns that this fixation has led to speculative bubbles and misallocation of capital 5.

In summary, while the 2% inflation target has historical roots and serves as a compromise that has provided some stability, many experts suggest that it might be due for reconsideration based on current economic realities and evolving understandings. The debate incorporates arguments for a higher target, maintaining credibility, and adapting to new economic lessons.