Finding the Right Inflation Target
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Finding the Right Inflation Target
Applied Economics Quarterly, Vol. 68 (2022), Iss. 3 : pp. 149–159
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Professor of Economics, Department of Economics and Finance, University of Louisiana at Lafayette, 214 Hebrard Boulevard, Lafayette, LA 70504, USA.
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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.
Table of Contents
| Section Title | Page | Action | Price |
|---|---|---|---|
| Deergha Raj Adhikari1: Finding the Right Inflation Target | 149 | ||
| 1. Introduction | 149 | ||
| 2. Model | 151 | ||
| 3. Data | 152 | ||
| 4. Empirical Analysis | 153 | ||
| 5. Summary and Conclusion | 156 | ||
| References | 157 |