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A case against a four percent inflation target

Kara, Engin and Yates, Tony 2021. A case against a four percent inflation target. Journal of Money, Credit and Banking 53 (5) , pp. 1097-1119. 10.1111/jmcb.12765
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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.

Item Type: Article
Date Type: Publication
Status: Published
Schools: Business (Including Economics)
Publisher: Wiley
ISSN: 0022-2879
Date of First Compliant Deposit: 9 April 2020
Date of Acceptance: 8 January 2020
Last Modified: 16 Oct 2021 11:09
URI: http://orca.cardiff.ac.uk/id/eprint/130904

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