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

IMF Working Papers, June 9, 2014

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Many central banks target an inflation rate near two percent.
The 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, resulting in less severe economic downturns.
This benefit would come at minimal cost because four percent inflation "does not harm an economy significantly."

Raising the long-run inflation target from two percent to four percent reduces the likelihood and severity of hitting the zero lower bound on nominal interest rates.
Lower incidence of the zero bound implies monetary policy can respond more effectively in recessions, mitigating downturn severity.
The trade-off is characterized as favorable: the macroeconomic costs of four percent inflation are minimal relative to the stabilizing benefits.

Policymakers should consider adopting a long-run inflation target of four percent to provide greater monetary policy space and reduce recession severity linked to the zero lower bound.

Author: Laurence M. Ball
Date: June 9, 2014
Series: Working Paper No. 2014/092
Issue: 092
Volume: 2014
Pages: 21
DOI: https://doi.org/10.5089/9781498395601.001
ISBN: 9781498395601
ISSN: 1018-5941
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

Source: IMF Working Papers — "The Case for a Long-Run Inflation Target of Four Percent" by Laurence M. Ball (June 9, 2014).