The optimal inflation target: Bridging the gap between theory and policy

Klaus Adam and Henning Weber

No 44/2024, Discussion Papers from Deutsche Bundesbank

Abstract: Many central banks worldwide announce numerical inflation targets, typically ranging from zero to two percent in advanced economies and higher in developing countries. Historically, a significant gap existed between the inflation targets pursued by central banks and those recommended by academic studies. This paper reviews traditional economic forces advocating for zero or negative inflation targets and surveys new forces justifying positive targets. Key factors include (i) trends in relative prices, (ii) the lower bound constraint on nominal interest rates, (iii) (downward) wage rigidity, and (iv) effects of product entry and aggregation. By examining these forces, we assess whether current inflation targets are optimal or require adjustment, and identify areas for future research on optimal inflation targets.

Keywords: Optimal inflation rate; relative price trends; effective lower bound; nominal rigidities; product aggregation (search for similar items in EconPapers)
JEL-codes: E31 E52 E58 (search for similar items in EconPapers)
Date: 2024
New Economics Papers: this item is included in nep-cba and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bubdps:311841

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