The author is the C Fred Bergsten Senior Fellow at the Peterson Institute for International Economics
Back in 2010, Giovanni Dell’Ariccia, Paolo Mauro and I argued for a 4 per cent target for inflation. At the time, central banks overwhelmingly rejected the idea. The reason was not so much disagreement with the logic, but the perception of a risk that, if they were to do so, they would lose credibility. The time has come to revisit the argument.
Twelve years ago, our case was based on a straightforward cost-benefit analysis. On the benefit side, a higher target and, by implication, higher average nominal interest rates would give more room for monetary policy to decrease interest rates when needed, reducing the risk of being constrained by the zero lower bound.