- Question
Should central banks target 2% inflation?
Inflation targeting went from being a radical view to the new orthodoxy of central banking. After most central banks have adopted it in practice, they have almost all converged on 2% as the right inflation target, although some emerging market central banks have higher inflation targets.
Yes, inflation targeting provides monetary stability
This position holds that central banks should target 2% inflation, as it provides monetary stability. It argues that a small positive target leaves a buffer against deflation — which central banks struggle to combat — and that low, stable inflation helps the economy run efficiently.
No, even targeting 2% inflation does not lead to monetary stability
This position holds that even a 2% inflation target fails to deliver real monetary stability. It argues that at 2%, money loses half its value over 25 years, so genuine price stability requires a target of 0% — and that sustained 2% inflation can itself help trigger an economic downturn.
Inflation is the wrong target and central banks should target nominal GDP trend growth
Targeting inflation is the wrong approach. An NGDP-targeting regime could also be more transparent and market-driven than the current interest-rate targeting regime. To further improve transparency, the Fed could engage in level targeting.