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.
No, even targeting 2% inflation does not lead to monetary stability
At 2% inflation, money will lose half its value in 25 years. Genuine price stability requires a target of 0% inflation.
Long-term inflation at 2% can cause an economic downturn
Lowering inflation, instead of keeping it at 2%, would be ideal in curbing the negative effects that inflation itself could have on the global economy.
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.
Targeting interest rates only affects demand, not supply
Both NGDP targeting and inflation targeting respond to demand shocks by adjusting the money supply to offset any change in the velocity of money (the rate at which money passes from one holder to another). However, NGDP targeting also responds appropriately to a supply shock in any sector of the economy.
