Raising the Inflation Target: How Much Extra Room Does It Really Give?
Jean-Paul L'Huillier () and
No 202016, Working Papers from Federal Reserve Bank of Cleveland
Some, but less than intended. The reason is a shift in the behavior of the private sector: Prices adjust more frequently, lowering the potency of monetary policy. We quantitatively investigate this channel across different models, based on a calibration using micro data. By raising the target from 2 percent to 4 percent, the monetary authority gets only between 0.51 and 1.60 percentage points of effective extra policy room for monetary policy (not 2 percentage points as intended). Getting 2 percentage points of effective extra room requires raising the target to more than 4 percent. Taking this channel into consideration raises the optimal inflation target by roughly 1 percentage points relative to earlier computations.
Keywords: timidity trap; zero lower bound; liquidity traps; central bank design; inflation targeting; Lucas proof; price stability (search for similar items in EconPapers)
JEL-codes: E31 E52 E58 (search for similar items in EconPapers)
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: Track citations by RSS feed
Downloads: (external link)
https://doi.org/10.26509/frbc-wp-202016 Full Text (application/pdf)
Working Paper: Raising the Inflation Target: How Much Extra Room Does It Really Give? (2019)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:fip:fedcwq:88168
Ordering information: This working paper can be ordered from
Access Statistics for this paper
More papers in Working Papers from Federal Reserve Bank of Cleveland Contact information at EDIRC.
Bibliographic data for series maintained by ().