Not surprisingly, central bankers who are committed to a formal or informal inflation target of about 2 per year are unwilling to abandon their mandates openly and to assert that they are pursuing a high rate of inflation. Nevertheless, their expansionary actions have helped to raise long term inflation expectations toward the target levels.

Consumer price inflation in the eurozone has been below target for 22 consecutive months long before the price of oil started collapsing. Cheaper oil is a boon for growth but it also lowers long term inflation expectations, which are the true target of monetary policy.

By contrast, the credibility associated with pursuing only an inflation target builds on itself. Given this, it would be safer and more effective for the Fed and other central banks to pursue a single inflation target, and then use the gain in credibility to aid economic recovery.

Doing so would reduce the debt and tax burdens on future generations, while crucially limiting the risks of much higher inflation in the nearer term. Moreover, a higher inflation target and the restoration of credibility that it would imply would enable central banks to return to a lower inflation target without creating a recession once debt levels had been reduced and aggregate demand had recovered.

The eurozone s inflation target is not a magic number, and it is irrational to let it determine the overall macroeconomic framework. If lower is always better, why not set the target at 1 , or even zero?

Perhaps if a central bank announced a higher inflation target, and implemented a financial asset purchase program (financed with unremunerated reserves) until the target were achieved, it could have some effect. But it is more likely that the concept of a target would lose credibility once it became changeable.

Many add a reference to general economic conditions, including growth and employment or financial stability. Some give the central bank the authority to set an inflation target unilaterally others stipulate coordination with the government in setting the target.

Some monetary authorities, like the European Central Bank, set their own target. Others, like the Bank of England (BoE), have full instrument independence control over short term interest rates but must meet an inflation target set by the government.

All of this implies that if the economy is at full employment and targeted inflation, the federal funds rate should equal 2 plus the rate of inflation. It should be higher if the inflation rate is above the target level and lower if current GDP is less than the full employment level.

In a more global context, none of this is to dismiss the longer term dangers of inflation. In most countries, at most times, inflation should be kept very low and central banks should anchor inflation expectations with a stable long term target, although the alternative of targeting nominal GDP deserves to be discussed.

But if the idea of the countercyclical buffer is now generally accepted, what of the nuclear option to prick a bubble Is it justifiable to increase interest rates in response to a credit boom, even though the inflation rate might still be below target? And should central banks be given a specific financial stability objective, separate from an inflation target?

Where inflation is returning to target levels, debt monetization could be unnecessarily and dangerously stimulative. Central bank bond sales, while certainly not inevitable, may be appropriate.

Meanwhile, sound monetary policy, guided by a series of talented central bankers (whose independence is enshrined in Chile s constitution), has prevented inflation and kept long term rates relatively low. Chile s inflation target is 3 with an acceptable range of plus or minus 1 .

Finally, an inadequate understanding of structural inflation (the growth in prices for non tradable assets) has generated the false belief that China can maintain similar levels of inflation and exchange rate stability as the OECD economies. As a result, over the last decade, the Chinese authorities implicit target for annual inflation and currency appreciation has been only about 3 .

One thing is certain The bill will put pressure on the Fed to pay more attention to inflation, avoiding a persistent rate above its own 2 target. Otherwise, the Fed s operational independence could be restricted, forcing it to focus its policies more sharply on its inflation mandate.

At least the existing 2 inflation target stands for something, because central bankers can portray it as the moral equivalent of zero. (Most experts believe that a true welfare based price index would show significantly lower inflation than government inflation statistics indicate, because official data fail to capture the benefits of the constant flow of new goods into the economy.)

These economic adjustments could occur much more smoothly if the eurozone as a whole were to pursue a more expansionary policy. If the target inflation rate for the eurozone were to be set temporarily at, say 3.5 , and if the countries with current account surpluses encouraged domestic inflation rates somewhat above the eurozone s target, there could be real price adjustment within the eurozone without price deflation in the troubled countries.

In the ten years prior to the 2008 financial crisis, independent central banks set an inflation target of about 2 , in order to provide economies with a price stability anchor. There should be no expectation that prices would be allowed to deviate, except temporarily, from the target.

The first knockout would occur if, in the MPC s view, it is more likely than not that CPI inflation 18 to 24 months ahead will be 0.5 percentage points or more above the 2 target. The second is that medium term inflation expectations no longer remain sufficiently well anchored.

According to the British National Bureau of Statistics, the British inflation rate was 3 in September this year, which is much higher than the 2 target set by the central bank.

Nevertheless, by the end of October, M2 money supply had increased by 18.4 growing by 1.3 faster year on year, and exceeding the 16 target. By the start of 2008, it was clear that controlling inflation and cooling an overheating economy had become the government s main economic target.

But if that were true, central banks around the world would have set it as a target long ago. Instead, all of them define price stability as low, stable, but positive inflation.

Following the discussion, Greenspan exhorted the FOMC members to keep the discussion of the inflation target secret. I will tell you that if the 2 inflation figure gets out of this room, he warned, it is going to create more problems for us than I think any of you might anticipate.

All the major Western central banks including even the traditionally hawkish ECB appear to be sticking their heads in the sand. But there is something they can do to ensure the benefits of inflation targeting rules (credibility and well anchored inflation expectations) while also supporting recovery raise the stated target.

Third, we have little idea about how the public forms expectations about the central bank s future actions. If the Fed announces that it will tolerate 4 inflation, could the public think that the Fed is bluffing, or that, if an implicit inflation target can be broken once, it can be broken again?

Unlike such tools, interest rate policy is a blunt instrument for dealing with financial imbalances. And using interest rates to address such concerns may interfere with the central bank s primary objective of keeping inflation near target.

In this context, the Draghi put was a highly defensible action. Refusing to consider any amount of monetary financing, and continuing to adhere to a strict inflation target, would have been much more difficult to justify.

Former Fed Chairman Alan Greenspan knew that it did not. On July 2, 1996, at a meeting of the Federal Open Market Committee (FOMC), which was devoted to extensive discussion of the appropriate inflation target for the Fed, Greenspan posed a simple question Are we talking about price stability or are we talking about zero inflation? he asked.

Some observers have argued for a higher stable inflation target in the eurozone to facilitate the relative deflation process in countries that need it, and to put the zero bound on interest rates further away, thereby enhancing the potential impact of monetary policy. But inflation has its own adverse distributional and efficiency implications, and would be fiercely resisted.

In early April, the BOJ announced plans to unleash the most aggressive bond buying program of all, promising to inject 1.4 trillion into the economy over the next two years in order to meet an inflation target of 2 . This is monetary policy on steroids, and, to opponents of inflation inducing money creation, it amounts to playing with fire.

For example, a central bank might announce that circumstances during, say, the next two years warrant a doubling of the inflation target from the usual that is, almost never varied annual rate of 2 . Such an approach would reduce the risk of debt deflation, while capping inflation expectations to prevent a damaging surge in prices as recovery takes hold.

Weak labor markets, low inflation, and debt overhang suggest that a fundamental re ordering of priorities is in order. In Japan, Shinzo Abe, the incoming prime minister, is signaling the same set of concerns, although he seems to be proposing a minimum inflation target for the Bank of Japan, rather than a link to growth or employment.

The second parameter, target, contains the PI target.

Since 2008, the Federal Reserve Board and the European Central Bank have failed to meet the 2 inflation target in any year the Bank of England (BoE) has been on target in only one year out of seven. Moreover, in 2015, prices in the United States, the eurozone, and the United Kingdom are set to fall.

The price level at any time is the result of many factors, of which monetary policy is perhaps the least important. Today, the collapse in the price of crude oil is probably the most significant factor driving inflation below target, just as in 2011 it was the rise in oil prices that drove it above target.

Forget Inflation

LONDON Speaking in the happier economic times of 2005, Mervyn King then, as now, Governor of the Bank of England stressed the importance of entrenching public expectations of stable, low inflation. He warned that, if you let inflation expectations drift too far away from the target, you can end up in quite serious difficulty with a costly process to bring them back again.

The current high stakes conundrum faced by policymakers suggests that they should apply inflation targeting principles more flexibly in the context of a major economic shock. This would involve raising the target to a level in line with the actual inflation rate observed in the post crisis period a level that the public would perceive as realistic, honest, and credible.

This survey raised questions about the view of the Bank of Japan on that robust economic expansion would help to accelerate inflation to the 2 target, although there were signs that enterprises were gradually shifting costs to the customers.

The first and most obvious is that risks to financial stability must be substantial. But the second condition is equally important adjusting the interest rate should not jeopardize the central bank s other key objective, namely achieving its inflation target.

The PBC should target the renminbi s rate of real appreciation, rather than the inflation rate under a stable renminbi. And then the government needs to focus more attention on structural adjustment the only effective cure for China s 3.2 trillion headache.

Beyond Inflation Targets

The Inflation Puzzle

Rethinking Inflation Targeting

Inflation or Deflation?