Morning Must-Read: Paul Krugman: Inflation Targets Reconsidered

Paul Krugman: : Inflation Targets Reconsidered “For a time 2 percent seemed to make both economic and political sense…

…high enough to render concerns about hitting the zero lower bound mostly moot… was low enough to satisfy most of those worried about the distortionary effects of inflation… [and] those who wanted true price stability… could be deflected with the argument that official price statistics understated quality change…. The 2 percent target also, of course, acquired the great advantage of conventionality…. More recently, however, the 2 percent target has come under much more scrutiny… advanced economies are far more likely to hit the zero lower bound than previously believed…. In response, a number of respected macroeconomists, notably Blanchard (2010) and, much more forcefully, Ball (2013), have argued for a sharply higher target, say 4 percent. But do even these critics go far enough? In this paper I will argue that they don’t–that the case for a higher inflation target is in fact even stronger than the critics have argued, for at least three reasons…. Secular stagnation…. [The] two zeroes [of] downward nominal wage rigidity… [and] the interest rate ZLB…. [A]n economic and political trap… [of] a self-perpetuating feedback loop between economic weakness and low inflation…