Finding the Right Inflation Target

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 p...

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Bibliographic Details
Published in:Applied economics quarterly 2022, Vol.68 (3), p.149-159
Main Author: Adhikari, Deergha Raj
Format: Article
Language:English
Subjects:
GDP
Gross Domestic Product
Inflation
Inflation targeting
Monetary policy
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Summary: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.
ISSN:1611-6607
1865-5122
DOI:10.3790/aeq.2022.1422301