2% Inflation. A steady rate of 4% simply isn’t sustainable politically
For a long time the focus was on the risk of underreaction, such as when the US had too little monetary and fiscal stimulus following the 2008 financial crisis. That was a myopic perspective, and so those commentators wanted an inflation target of say 4% to limit the possibility of aggregate demand shortfalls in the future.
At the time, expansionary advocates believed that it would fill an output gap rather than boost prices, and neither markets nor most economists expected anything like the resulting inflation rates. It is likely that these same mistaken beliefs would have prevailed at a starting point of a 4% inflation rate.
The “liquidity trap” arguments for a 4% inflation rate are complex, and I strongly suspect they are not political winners, given the unpopularity of inflation. For better or worse, this is no longer a world in which elites can simply do what they deem best, without much popular support.
Tyler Cowen Bloomberg 26 juni 2023
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