A Case against a 4% Inflation Target. Issue 5 (24th February 2021)

• Record Type: Journal Article
• Authors: KARA, ENGIN; YATES, TONY
• Is Part Of: Journal of money, credit, and banking. Volume 53:Issue 5(2021)
• Page Start: 1097
• Page End: 1119
• Publication Date: 2021-02-24
• Subjects: trend inflation -- determinacy -- sticky prices -- New Keynesian -- Taylor rules; Banks and banking -- Periodicals; Credit -- Periodicals; Money -- Periodicals; 332
• DOI: 10.1111/jmcb.12765
• Languages: English
• ISSNs: 0022-2879

Abstract

Abstract: We reformulate the standard New Keynesian model to include heterogeneity in price stickiness suggested by microevidence on price changes and to allow for positive trend inflation. In the new model, higher trend inflation leads to a relatively greater long‐run output loss and, consequently, a smaller determinacy region than in the standard model. When trend inflation is 4%, the determinacy region of the new model is almost nonexistent, cautioning against increasing the inflation target to 4% as a means to avoid the zero lower bound in the future and pointing to the costs that high inflation may have had in the past.