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Finding the Right Inflation Target

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  • Deergha Raj Adhikari

Abstract

Many believe that the inflation target of 2 percent as set by the U.S. Federal Reserve is too low. Setting an inflation target that is too low or too high would prompt the Fed to prematurely use a contractionary or expansionary monetary policy, thereby doing more harm than good to the economy. Our purpose, therefore, was to find the right inflation target from a U.S. monetary policy perspective. We applied the threshold model on U.S. real GDP growth rate and the inflation rate using annual data from 1990 to 2020. Our study found that an inflation rate of up to 3.39 percent would positively impact the growth rate of real GDP and that above that, it had no effect. The policy implication of our study is therefore that the right inflation target from U.S. monetary policy perspective would be 3.39 percent.

Suggested Citation

  • Deergha Raj Adhikari, 2022. "Finding the Right Inflation Target," Applied Economics Quarterly (formerly: Konjunkturpolitik), Duncker & Humblot GmbH, Berlin, vol. 68(3), pages 149-159.
    • Handle: RePEc:dah:aeqaeq:v68_y2022_i3_q3_p149-159
    DOI: 10.3790/aeq.68.3.149
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    More about this item

    Keywords

    Growth rate of real GDP; inflation rate; threshold model; right inflation target; monetary policy;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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