Should central banks change their inflation targets?

Question

In 2012 under Ben Bernanke, the Fed publicly announced that their inflation target would be at 2%, which was already for some time the informal target rate.

But today the FOMC believes the long-term natural funds rate to be at about 3-3.25%. Given that in the past three recessions the Fed lowered rates by an average of 5.79%, this is not enough "ammunition" to combat the next recession.

Some economists have argued to change the target rate to 4% (Ball, 2014), and others have argued for other methods like setting a targeted range of inflation rates (Ed Rosengren, Boston Fed president) while others still have proposed a price-level targeting framework rather than an inflation-rate targeting framework (John Williams, SF Fed president).

Is a change necessary in the long-term? What possibilities should be explored?

Answer 1

My opinion is that inflation is down because corporate profit rates are at record highs. Corporations do not need to raise prices. Capacity utilization is low also because labor share is down. So even if the Fed wanted a 4% inflation target, in this environment they wouldn't reach it.
My model sees a 3% inflation as more reasonable than a 4% target.

Here is a post of my model from November, 2016. The model is still holding true.
http://effectivedemand.typepad.com/ed/2016/11/inflation-as-mouse.html

Here is another post of mine on inflation targets using the same model from July, 2016.
http://effectivedemand.typepad.com/ed/2016/07/3-inf-target.html

Answer 2

A big question with no definitive answer... your views will to some extent depend on whether you think the costs of a 4% steady state inflation rate are significantly higher than those associated with 2%, and there's not a whole lot of evidence on the costs of inflation in this range. There's also the possibility of nominal GDP targeting, which has a certain logic - Larry Summers has been making the case of late.

Answer 3

I suggest you read my paper: "Theory and Model of Inflation - Complete Unified Framework with Banach Spaces, Fixed-Point Equilibrium, ACF, GMM Optimization, and Historical Synthesis - Comprehensive 60-Year Empirical Validation (1965-2025) Across Eight Countries with Robustness Analysis, Unifying Framework for Economic Thought, and Policy Implementation Guidelines"

https://papers.ssrn.com/abstract=5752022

Below is the abstract:
This unified paper presents the complete theoretical and empirical analysis of Pytel's inflation theory, integrating four foundational perspectives: (1) rigorous mathematical foundations with Banach fixed-point equilibrium and long-memory autocorrelation function; (2) GMM-optimized component weights derived endogenously from 60 years of data; (3) comprehensive robustness and reliability analysis comparing Systemic Risk of Doing Business (SRDB) to established economic indicators (inflation and GDP measurement); (4) historical synthesis demonstrating Pytel's framework as unifying paradigm reconciling Smithian, Marxian, Keynesian, Hayekian, and Friedmanian economics.

Main Contributions:
(1) Demonstrates GMM optimal weights reveal financial risk premiums dominate (57% average) over computational costs (24%) and structural fragility (19%), reflecting market efficiency.
(2) Validates Sustainable Growth Principle empirically via Johansen cointegration tests (p < 0.01 all countries).
(3) Proves Banach contractivity across all countries (|β| + κ ∈ [0.56, 0.85]) establishing unique equilibrium.
(4) Achieves 48-58% RMSE reduction versus benchmarks (AR(1), Phillips Curve, Taylor Rule) in outof-sample tests.
(5) Predicts major crises (2008 GFC, 2020 COVID, 2021-23 supply surge) with 94-96% lower errors than competing models.
(6) Establishes SRDB robustness comparable to or exceeding inflation and GDP measurement standards.
(7) Demonstrates Pytel framework unifies five major schools of economic thought as special cases within comprehensive synthesis.
(8) Provides operational central bank implementation framework with 6-15 month lead time.

Key Empirical Results:
(1) Average RMSE 0.82 (Pytel-GMM) versus 1.47 (AR(1)), 1.38 (Phillips Curve), 1.40 (Taylor Rule).
(2) Crisis forecasting: average error 0.10pp versus 2.78pp (AR), 2.28pp (Phillips)-96% reduction. Cointegration trace statistics 39.6-51.3 (critical value 35.46). Contractivity satisfied across all countries. Hansen J-tests confirm specification validity (all p > 0.75).
(3) Rolling-window validation: 13,800+ independent forecasts confirm stability.
(4) Historical synthesis: Each economic school dominates during periods when its emphasized component matters most, validating integration.

Framework Status:
The Pytel-Banach-ACF-GMM model represents paradigm shift from arbitrary specifications to data-driven optimal aggregation of systemic risk components, providing first unified framework for inflation economics in 250 years of economic thought. Real-time implementation enables central banks to achieve quarterly inflation target updates using observable financial indicators with proven predictive power.