The Case for a Long-Run Inflation Target of Four Percent
22 Pages Posted: 18 Jul 2014
Date Written: June 2014
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.
Keywords: Inflation targeting, Inflation rates, Monetary policy, Central banks, Inflation, Inflation Target, percent inflation, central bank, inflation rate, real interest rate, nominal interest rates, low inflation, monetary economics, price level, aggregate demand, costs of inflation, actual inflation, monetary fund, monetary base, effects of inflation, nominal interest rate, price stability, high inflation, rates of inflation, real value, average inflation, rate of inflation, relative price, relative price variability, monetary economists, inflation process, real interest rates, relative prices, lower inflation, rational expectations, monetary policy strategy, intermediate monetary target, optimal
JEL Classification: E31, E58, E52
Suggested Citation: Suggested Citation