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A Case against a 4% Inflation Target

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  • ENGIN KARA
  • TONY YATES

Abstract

We reformulate the standard New Keynesian model to include heterogeneity in price stickiness suggested by microevidence on price changes and to allow for positive trend inflation. In the new model, higher trend inflation leads to a relatively greater long‐run output loss and, consequently, a smaller determinacy region than in the standard model. When trend inflation is 4%, the determinacy region of the new model is almost nonexistent, cautioning against increasing the inflation target to 4% as a means to avoid the zero lower bound in the future and pointing to the costs that high inflation may have had in the past.

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  • Engin Kara & Tony Yates, 2021. "A Case against a 4% Inflation Target," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 53(5), pages 1097-1119, August.
    • Handle: RePEc:wly:jmoncb:v:53:y:2021:i:5:p:1097-1119
    DOI: 10.1111/jmcb.12765
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