Inflation Targeting in an Uncertain Environment
The recent price shock has sparked a debate on the inflation target, which has been the main pillar of central bank strategies since the 1990s. This article looks first at the theoretical question of the inflation rate before discussing the conditions that justify the choice of a 2% target. It then examines the arguments for and against changing this benchmark, before considering some alternative policy options. The conclusion is that, in all cases, central banks will have to justify the relevance of their policy goals on economic grounds better than they do today.
The inflation shock induced by the pandemic and the war in Ukraine has reignited discussions regarding the inflation target, which has been a central pillar of central bank strategies since the 1990s. One matter under debate, especially within academic circles, revolves around the relevance of the 2% inflation target, which serves as a standard for price stability in the primary currency areas1. Some current and former central bankers are also involved in discussions which, beyond the theoretical realm, may lead to changes in target policies2. In advanced countries, central banks were the first to be tasked with addressing the resurgence of inflation, aligning with the simplistic – yet inaccurate – notion that inflation was universally and solely a monetary phenomenon. However, managing inflation in the long run also involves grappling…