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Should central banks raise their inflation targets? Some relevant issues

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  • Bennett T. McCallum

Abstract

Several arguments are relevant. (1) In the absence of the zero lower bound (ZLB), the optimal steady-state inflation rate, according to standard reasoning, lies between deflation at the steady-state real interest rate and the Calvo-model value of zero, with calibration indicating a larger weight on the latter. (2) An attractive modification of the Calvo equation would imply that the weight on the second of these should be zero. (3) There may be some scope for monetary policy to be effective even at the ZLB. (4) Elimination of currency is feasible and would remove the ZLB constraint. (5) Increasing target inflation would undermine the rationale for central bank independence and constitute an additional movement away from intertemporal discipline.

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Bibliographic Info

Article provided by Federal Reserve Bank of Richmond in its journal Economic Quarterly.

Volume (Year): (2011)
Issue (Month): 2Q ()
Pages: 111-131

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Handle: RePEc:fip:fedreq:y:2011:i:2q:p:111-131:n:v.97no.2

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Keywords: Inflation (Finance) ; Monetary policy ; Banks and banking; Central;

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References

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  1. John C. Williams, 2009. "Heeding Daedalus: Optimal Inflation and the Zero Lower Bound," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 40(2 (Fall)), pages 1-49.
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Cited by:
  1. Alexandru Ciungu, 2012. "Inflation targeting, the zero lower bound and post-crisis monetary policy," Post-Print dumas-00801712, HAL.

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