Should Central Banks Raise Their Inflation Targets? Some Relevant Issues

21 Pages Posted: 19 Dec 2012

See all articles by Bennett T. McCallum

Bennett T. McCallum

Carnegie Mellon University - David A. Tepper School of Business; National Bureau of Economic Research (NBER)

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Date Written: April 1, 2011

Abstract

Several arguments are relevant. (1) In the absence of the zero lower bound (ZLB), the optimal steady-state inflation rate, according to standard reasoning, lies between deflation at the steady-state real interest rate and the Calvo-model value of zero, with calibration indicating a larger weight on the latter. (2) An attractive modification of the Calvo equation would imply that the weight on the second of these should be zero. (3) There may be some scope for monetary policy to be effective even at the ZLB. (4) Elimination of currency is feasible and would remove the ZLB constraint. (5) Increasing target inflation would undermine the rationale for central bank independence and constitute an additional movement away from intertemporal discipline.

Suggested Citation

McCallum, Bennett T., Should Central Banks Raise Their Inflation Targets? Some Relevant Issues (April 1, 2011). FRB Richmond Economic Quarterly, vol. 97, no. 2, Second Quarter 2011, pp. 111-131, Available at SSRN: https://ssrn.com/abstract=2190598

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