A simple refutation of raising the inflation target


  1. Inflation falls if there is significant spare capacity.
  2. If the central bank can consistently hit its inflation target there is no spare capacity.
  3. If there is no spare capacity, there is no policy problem.
  4. There is only a problem if inflation is below target AND the central bank cannot raise the inflation rate.
  5. If the central bank cannot raise the inflation rate, and inflation is below target, it cannot hit a higher inflation target.


Raising the inflation target cannot be a solution to 4. If the CB cannot hit its current inflation target, it cannot hit a higher one (5). If it can hit its current inflation target, there is no problem (2 & 3).

It should be noted that prior to 4 occurring, a higher inflation target might reduce the probability of 4 occurring, but once 4 has occurred, raising the inflation target cannot be a solution.

Also, if 4 is occurring, the central bank cannot hit a nominal GDP target at will (this only requires the additional assumption that if the CB cannot raise the inflation rate it cannot hit a nominal GDP target at will). Therefore nominal GDP targeting cannot be a solution, either.

To believe that raising the inflation target or nominal GDP targeting are policy solutions to 4, one has to believe that one of more of 1-3, and/or 5, are false.

For a detailed explanation of 1-4, this by Simon Wren-Lewis is spot on. For a defence of raising the inflation target, read Brad DeLong and Tony Yates. I think Brad advocates a higher target precisely to reduce the probability of 4 occurring, rather than as a solution once it has occurred. The ever-insightful David Beckworth argues for regime change and nominal-GDP targets here. For denial of the futility of using current tools to raise the inflation rate, this by Frances Coppola is superb.

About The Author

Eric Lonergan is a macro fund manager, economist, and writer. His most recent book is Money (2nd ed) published by Routledge. He is also a supporter of Big Issue Invest (BII), the investment arm of The Big Issue, and is one of the initial limited partners in BII’s Social Enterprise Investment Fund LP. In a personal capacity, he makes direct investments in social enterprises. He also supports and advises The Empathy Museum.

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