Work

Should the Federal Reserve raise its inflation target?

Year: 2024

Type: article

Abstract: Standard economic reasoning shows that higher inflation imposes higher tax rates on money balances and unindexed savings, causing financial losses to households and reducing their real incomes. The leading cases for the Federal Reserve to raise its inflation target—that more inflation better “greases the wheels” of a sticky‐price economy, or that it beneficially keeps us farther above the zero lower bound on nominal interest rates—rest on supposed gains from higher inflation that do not plausibly outweigh the losses. The “grease” argument that low inflation reduces real GDP is inconsistent with historical experience under low‐inflation regimes. The argument that the inflation target should be raised to give the Federal Reserve “more ammunition” to fight recessions overlooks effective and less costly methods for conducting counter‐recessionary monetary policy, in particular quantitative easing.

Source: Southern Economic Journal

DOI: 10.1002/soej.12737

Author: Lawrence H. White

Institution: George Mason University

Language: English

Topic: Monetary Policy and Economic Impact

Subfield: General Economics, Econometrics and Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: hybrid

Estimated APC paid: $2,870

Funders: Florida Atlantic University, Universidad del Atlántico