Sunday, December 21, 2014
The History Of The 2% Inflation Rate Target
Most of the world's central banks have a target inflation rate of 2%. This article provides an overview of the history of that target which may have been set 25 years ago by the central bank of New Zealand, and ultimately became a common central bank target. More importantly, it discusses the strengths and weaknesses of that common target. A higher target would provide greater flexibility during serious recessions because central banks would be less likely to hit the zero lower bound when they cut interest rates to stimulate the economy. If the target rate were 4% they would have more freedom than they do at 2%. There are also advantages that derive from the lower target because it is easier to make economic plans when the purchasing power of money is more constant.