Higher Inflation Target is a Non-Issue

Paul Krugman is pushing for a higher inflation target. Joseph Stiglitz pushed for it a couple of years ago and then put the issue on the shelf well, he is still talking about it. (source)

Even as the ECB’s president, Mario Draghi, said at the ECB conference where Mr. Krugman is presenting his case for a higher inflation target…

“Mr. Draghi’s response: try telling that to Germany. “What would it mean for a German, for example, to have a 5% objective in the whole of the euro area?” Mr. Draghi asked later Tuesday. “I don’t even want to think [about] that.” (source)

The basic reason that a higher inflation target is a non-issue is that the nominal base rates from central banks will stay low anyway… lower than normal for quite some time. Even some at the Federal Reserve of the United States thinks that inflation will probably return to its 2% target in 2018…. What!?… That’s right, 2018.

I think that higher inflation targets is a solution for some who cannot accept the dynamics of the Fisher effect where inflation is low due to low nominal rates from the central banks.

Mario Draghi needs to think about the Fisher effect instead of higher inflation targets.