The Case for a Long-Run Inflation Target of Four Percent

June 9, 2014

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Many central banks target an inflation rate near two percent. This essay argues that policymakers would do better to target four percent inflation. A four percent target would ease the constraints on monetary policy arising from the zero bound on interest rates, with the result that economic downturns would be less severe. This benefit would come at minimal cost, because four percent inflation does not harm an economy significantly.

Subject: Banking, Financial services, Inflation, Inflation targeting, Monetary policy, Prices, Real interest rates, Zero lower bound

Keywords: economist, Europe, federal funds rate, Global, Inflation, inflation expectation, inflation low, inflation process, inflation rate, inflation rise, Inflation Target, Inflation targeting, inflation uncertainty, lower-than-average inflation, Monetary Policy, nominal interest rate, Real interest rates, recession, single-digit inflation, WP, Zero lower bound

Pages:
21
Volume:
2014
DOI:
https://doi.org/10.5089/9781498395601.001
Issue:
092
Series:
Working Paper No. 2014/092
Stock No:
WPIEA2014092
ISBN:
9781498395601
ISSN:
1018-5941

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