#Inflation targeting, why 2%


Some recent analysis communicated by the Federal Reserve is telling us that the low inflation environment we are getting used to, is limiting the possibilities of monetary policy facing future slowdowns in the economic cycle. The size of needed negative real rates to kick start a slow economy is such that in presence of today’s inflation rates, the policy maker will need to use again unconventional tools, not only to face an exceptional crisis.

The observation is again putting the economists profession in a difficult position: we have seen how most economists are very elegant in describing what happened, very rarely they can describe it in advance. The Federal Reserve observation delivers an even more worrying message, we reached a target (2% inflation rate) that has been declared without sufficient knowledge of its side effects. We have been able to find only one central bank declaring the reason for the 2% target, this one was the Riksbank in 1993. The statement at that time was that 2% inflation rate was picked because “it was in line with the inflation targets in other industrial nations”.

You might object that this motivation is extremely poor (“I do it because the others do it too”, strongly reminiscent of childish behaviors), nonetheless it remains that this is the only motivation we have been able to find.

We live through a difficult age, we are convinced that digging well through our mistakes can only help to avoid them again.




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