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Should central banks target 2% inflation? Show more Show less

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 Show more Show less

Having a positive 2% inflation target provides enough room to prevent any fall into deflation, which central banks are poorly equipped to deal with.
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Low, stable inflation helps the economy operate efficiently

When inflation is low and stable, individu­als can hold money without having to worry that high inflation will rapidly erode their purchasing power.
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Context

The Argument

Low, stable inflation provides individuals with more monetary stability and purchasing power. It also helps the economy move towards stability, thereby encouraging individuals to save and invest. According to economist Richard G. Anderson, price stability is "a prerequisite for attaining maximum sustainable economic growth."[1] Having low, stable inflation reduces economic volatility, and its effects are experienced in the United States and abroad. With economic growth and a reduction in economic volatility, busi­nesses and households can make more accurate longer-run financial decisions about borrowing, lending, saving, and investing. Anderson also claims that sustained low inflation is necessary for an economy to achieve long-run economic growth.[1] By having low, stable inflation, longer-term interest rates are more likely to be moderate.

Counter arguments

Framing

Premises

[P1] A 2% inflation rate causes lower levels of inflation and economic sustainability. [P2] With more stability, businesses and central banks and look into the future economic landscape more accurately, minimizing the risk of uncertainty and downturn in both the near and far future. [P3] Therefore, a 2% inflation rate should be implemented within a modern economy.

Rejecting the premises

Proponents

Further Reading

References

  1. https://www.stlouisfed.org/publications/central-banker/summer-2006/the-longrun-benefits-of-sustained-low-inflation
This page was last edited on Wednesday, 22 Jul 2020 at 16:21 UTC