Should central banks raise their inflation targets? Some relevant issues

Bennett McCallum

Economic Quarterly, 2011, vol. 97, issue 2Q, 111-131

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.

Keywords: Banks and banking, Central; Monetary policy; Inflation (Finance) (search for similar items in EconPapers)
Date: 2011
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