EconPapers    
Economics at your fingertips  
 

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)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Date: 2018-05
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
https://www.bis.org/publ/work720.pdf Full PDF document (application/pdf)
https://www.bis.org/publ/work720.htm (text/html)

Related works:
Journal Article: Could a higher inflation target enhance macroeconomic stability? (2018) Downloads
Working Paper: Could a Higher Inflation Target Enhance Macroeconomic Stability? (2018) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bis:biswps:720

Access Statistics for this paper

More papers in BIS Working Papers from Bank for International Settlements Contact information at EDIRC.
Bibliographic data for series maintained by Christian Beslmeisl ().

 
Page updated 2019-02-12
Handle: RePEc:bis:biswps:720