I have made most of these comments as comments on Econbrowser and Angry Bear (an excellent post by Robert Waldman), as well as on Econbrowser in response to a serious post by Jeffrey Frankel. I note that pgl has added useful comments on this matter in the other blogs.
So it was 1990 that the New Zealand central bank became the first in the world to impose an inflation target of 0-0.002. It worked out pretty well for NZ, and in general it has not done too badly in general where applied, well beyond the US. Of course, global inflation has declined, with a handful of exceptions.
In the mid-90s the US grew better than it had previously, and in the middle of the decade there was an important moment regarding policy. There was no inflation directive but Fed Chair Greenspan was facing a de facto such directive based on central Fed estimates that there was a known “natural rate of unemployment (=NAIRU) that must not be passed.
As it was then Fed Gov Janet Yellen in the mid 90s convinced Greenspan not to raise interest rates partly because of a paper by her husband, Noblelist George Akerlof. This famous paper from 1996 out of Brookings where George was due to Janet being at the Fed,
I always thought a low but inflation-positive target was used to
1. recognize human bias toward progress (even if only in nominal terms – “my earnings/assets are going up!”}
2. signaled caution to the markets – not risk actual deflation, but recognize a low inflation rate of inflation probably did not capture all inflating goods and services.
Makes the people happy; businesses can plan their investments.
Not sure any of this applies in today’s world!
Mark:
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