The Optimal Level of the Inflation Target: A Selective Review of the Literature and Outstanding IssuesOleksiy Kryvtsov and Rhys Mendes () Discussion Papers from Bank of Canada Abstract: Bank of Canada research done prior to the most recent renewal of the inflation-control agreement in 2011 concluded that the benefits associated with a target below 2 per cent were insufficient to justify the increased risk of being constrained by the zero lower bound (ZLB) on nominal interest rates. International experience and analysis since the 2011 renewal has reinforced the importance of the ZLB. Despite the deployment of unconventional monetary policy measures by many central banks, the ZLB has proven to be a more severe and persistent obstacle to the achievement of policy goals than expected. At the same time, analysis by the Bank and others has found that interest rates are likely to be lower on average in the future than they were during the first two decades of inflation targeting. As a consequence, the probability of being constrained by the ZLB is likely higher. Together, these factors suggest that a target above 2 per cent should be considered. This paper provides an overview of the current state of knowledge and key outstanding issues regarding the costs and benefits of a higher inflation target. Keywords: Inflation targets; Inflation: costs and benefits; Monetary policy framework (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:bca:bocadp:15-8 Access Statistics for this paper More papers in Discussion Papers from Bank of Canada 234 Wellington Street, Ottawa, Ontario, K1A 0G9, Canada. Contact information at EDIRC. |
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