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 hedge fund manager, economist, and writer. His most recent book is Supercharge Me, co-authored with Corinne Sawers. He is also author of the international bestseller, Angrynomics, co-written with Mark Blyth, and published by Agenda. It was listed on the Financial Times must reads for Summer 2020. Prior to Angrynomics, he has written Money (2nd ed) published by Routledge. He has written for Foreign AffairsThe Financial Times, and The Economist. He also advises governments and policymakers. He first advocated expanding the tools of central banks to including cash transfers to households in the Financial Times in 2002. In December 2008, he advocated the policy as the most efficient way out of recession post-financial crisis, contributing to a growing debate over the need for ‘helicopter money’.

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