Could a higher inflation target enhance macroeconomic stability?

José Dorich, Nicholas Labelle St-Pierre, Vadym Lepetyuk and Rhys Mendes ()

No 720, BIS Working Papers from Bank for International Settlements

Abstract: Recent international experience with the effective lower bound on nominal interest rates has rekindled interest in the benefits of inflation targets above 2 per cent. We evaluate whether an increase in the inflation target to 3 or 4 per cent could improve macroeconomic stability in the Canadian economy. We find that the magnitude of the benefits hinges critically on two elements: (i) the availability and effectiveness of unconventional monetary policy (UMP) tools at the effective lower bound, and, (ii) the level of the real neutral interest rate. In particular, we show that when the real neutral rate is in line with the central tendency of estimates, raising the inflation target yields some improvement in macroeconomic outcomes. There are only modest gains if effective UMP tools are available. In contrast, with a deeply negative real neutral rate, a higher inflation target substantially improves macroeconomic stability regardless of UMP.

Keywords: inflation target; effective lower bound; unconventional monetary policy; quantitative easing; forward guidance (search for similar items in EconPapers)
JEL-codes: E32 E37 E43 E52 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2018-05
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Related works:
Journal Article: Could a higher inflation target enhance macroeconomic stability? (2018)
Journal Article: Could a higher inflation target enhance macroeconomic stability? (2018)
Working Paper: Could a Higher Inflation Target Enhance Macroeconomic Stability? (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:bis:biswps:720

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