Why 2 Percent for the inflation target, Janet et al?

September 25th, 2014 at 9:40 am

A number of commenters asked this good question, so I answered it. Over at PostEverything.

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5 comments in reply to "Why 2 Percent for the inflation target, Janet et al?"

  1. Robert Salzberg says:

    One of the best parts of Chicago Fed President Charles Evans’ speech was that his rumination on how having above 2% inflation to balance 6 years of below 2% inflation was reasonable.

    The ECB and Fed inflation hawks have tried to make 2% an upper limit instead of an average. Evans’ forceful explanation of the damage associated with the ZLB and how it defangs the Fed implies that 2% should be both the target and the lower purposeful limit of the range of inflation in order to avoid defanging the Fed and sending the economy into a self-imposed tailspin.

  2. Flex says:

    From the post over at PostEverything, Jared wrote, “I vaguely remember some other explanation: The central bankers who first decided on 2 percent, which is a common target throughout advanced economies, believed that the measured inflation rate was biased up by something like this amount. So they were really trying to set the target rate at zero.”

    If my memory is correct, when I asked the same question in my graduate-level economics class, I was told was that slow, consistent, growth of 2% in an economy is considered a good target for growth. I.e. growth of >10% would indicate a bubble economy, and negative growth is certainly a problem.

    So the inflation rate target was set the same as the growth target with the idea that the money supply needs to expand at the same rate as GNP. (Yes, this was some time ago, before GDP replaced GNP.) I’m not certain this makes any sense from an economic theory perspective. I don’t even pretend to be an economist.

  3. Tyler says:

    Productivity is growing so rapidly that I don’t think America will have high inflation ever again.

  4. Tom in MN says:

    Here is a big reason I think that the 2% target is too low:


    If the 2% target were the correct value, long term rates (and most other economic variables) would have stable averages. Instead long term rates are falling steadily. Why is this a problem? Look at the short term rate needed to make the economy contract: it’s the long term rate. The FOMC is getting boxed into a corner and has very little room above the ZLB with long term rates where they are now. We need long term rates to stabilize (at a higher value) and the way to get that is to increase inflation expectations by raising the target.