Krugman, P. (2014) “Inflation Targets Reconsidered“, Draft paper for ECB Sintra conference, May 2014.
Over the course of the1990s many of the world’s central banks converged on an inflation target of 2 percent. Why 2 percent, rather than 1 or 3? The target wasn’t arrived at via a particularly scientific process, but for a time 2 percent seemed to make both economic and political sense. On one side, it seemed high enough to render concerns about hitting the zero lower bound mostly moot; on the other, it was low enough to satisfy most of those worried about the distortionary effects of inflation. It was also low enough that those who wanted true price stability -zero inflation- could be deflected with the argument that official price statistics understated quality change, and that true inflation was in fact close to zero.
And as it was widely adopted, the 2 percent target also, of course, acquired the great advantage of conventionality: central bankers couldn’t easily be accused of acting irresponsibly when they had the same inflation target as everyone else.
Relevant posts:
- Hatcher, N. & Minford, P. (2014) “Inflation targeting vs price-level targeting: A new survey of theory and empirics“, VoxEU Organisation, 11 May.
- Pisani-Ferry, J. (2013) “Europe’s real inflation problem“, Project Syndicate, 30 November.
- Münchau, W. (2013) “The eurozone needs to get inflation up again“, The Financial Times, 10 November.