The crisis has shown that large adverse shocks can and do happen. In this crisis, they came from the financial sector, but they could come from elsewhere in the future—the effects of a pandemic on tourism and trade or the effects of a major terrorist attack on a large economic center. Should policymakers therefore aim for a higher target inflation rate in normal times, in order to increase the room for monetary policy to react to such shocks? To be concrete, are the net costs of inflation much higher at, say, 4 percent than at 2 percent, the current target range? Is it more difficult to anchor expectations at 4 percent than at 2 percent?
This was followed by a piece in VoxEu written by an IMF researcher arguing that a 4% inflation target would have done wonders for Japan:
Olivier Blanchard, the IMF’s Chief Economist, recently broached the idea that central banks should target an inflation rate of 4% during the good times to leave more room for nominal rate cutting during bad times.
Read the whole article here.