by And of a 3% inflation target? There is some risk of recession in the USA because the FED insists on driving inflation down to 2%. Oddly back in the naughts when inflation was persistently below the 2% target, there was more discussion of raising the target. Then IMF chief economist discussed it. Paul Krugman advocated it: “The basic point is that a higher baseline for inflation would make liquidity traps, in which conventional monetary policy is up against the zero lower bound, less likely and less costly when they happen.” “What do we want? Four percent! When do we want it? Now!” The Chicago Booth definitive standard for professional consensus polled its panel of experts on it. This discussion was a bit odd. At the time, inflation was
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Robert Waldmann considers the following as important: inflation target, US EConomics
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and of a 3% inflation target?
There is some risk of recession in the USA because the FED insists on driving inflation down to 2%. Oddly back in the naughts when inflation was persistently below the 2% target, there was more discussion of raising the target. Then IMF chief economist discussed it.
Paul Krugman advocated it: “The basic point is that a higher baseline for inflation would make liquidity traps, in which conventional monetary policy is up against the zero lower bound, less likely and less costly when they happen.” “What do we want? Four percent! When do we want it? Now!” The Chicago Booth definitive standard for professional consensus polled its panel of experts on it.
This discussion was a bit odd. At the time, inflation was persistently below the 2% target even with interest rates at their lower bound. The argument was that a promise to get inflation up to 4% when it could be increased at all would work through the expectations channel. This requires the current monetary authority to make a credible commitment abouit the future actions of the monetary authority when it would be run by different people. The proposal was made (explicitly) because it was the only option since fiscal authorities had decided against further fiscal stimulus.
Now the 2% target really matters. The insistence that inflation must be 2% not 3% might impose extremely large costs. But there is less written on the topic now now by those guys.
Why ?
Maybe this is partly because the interesting theoretical argument was that a higher target was needed to avid the zero lower bound and liquidity trap. Now the argument is too obvious.
Certainly, ss a rhetorical strategy, it is much better to argue that the US will reach the target with lower interest rates than to argue against the 2% target.
Raising the target when one is above target looks like declaring victory when defeated and has a large cost of reduced credibility (which really means loosing face).
Unfortunately, if it is impossible to raise the inflation target when inflation is over 2%, it is probably always impossible to raise it — the target won’t be increased when the economy is in a liquidity trap because the increase matters little since neither the 2% nor the 4% target can be reached any time soon. Or the target can’t be raised because the increase looks like surrender. There can only be a radical policy change when everything is fine. That doesn’t happen. The target chosen with no thought or rationale is apparently invincible.