P248 inflation targeting(2)

Is inflation targeting dead? Central Banking After the Crisisnot-yet-operational Outright Monetary Transaction (OMT) programme brought intobeing only when the very existence of the euro itself was under threat.Overall, I think the Crisis has weakened the case for central banks to be given a single,price-stability mandate and broadened the case for them to be given a wider set ofprimary goals that would include macroeconomic stability.Is the 2% inflation target too low?These arguments are not to deny the importance of central banks having a transparentand clear medium-term objective for price stability. But it is not at all clear why thisgoal has to be phrased as an inflation target, and it’s even less clear why that inflationtarget should equal the almost universally accepted standard of 2%.Personally, I believe recent experience points to 2% being too low. In the period sincethe 2% standard became widely accepted in the 1990s:• The global economy has had two periods of recession; in both, deflation becameeither a reality or a threat across a number of advanced economies.• We know now that the liquidity trap is not a theoretical curiosity.Economies that operate at a 2% average rate of inflation are one recession away fromthe difficulties associated with falling into that trap.Set against these dangers, I don’t know of a single study that can explain how the socialcosts of a steady inflation rate of 3% or 4% would offset the reduced risk of deflationdue to such a low target rate.Should the targeting be price changes or price levels?It is also worth noting that even the leading pre-Crisis theoretical approach that waswidely used to analyse inflation-targeting regimes does not propose inflation targeting108