The standard belief in the central
banking circles has been that
monetary policy should essentially aim at low inflation, of about
1-2%, with all other macroeconomic objectives being less important. As a
matter of fact, central bankers across the globe by and large "agreed that low
or zero inflation is the appropriate long-run goal for monetary policy." The
idea of keeping low and stable inflation rate also got support from strong
theoretical backing as well as the reputational need of the central bankers
worldwide to primarily focus on low inflation.
Even the International Monetary Fund (IMF) has also, for decades, advocated
the policy of targeting very low inflation rate. However, in mid-February
2010 when the entire global economy has been staging a recovery, in a
distinct shift from its earlier stance, the IMF has suggested that central
banks should raise their inflation targets. This has brought to the fore the new
debates on inflation targeting, its requirement and effectiveness. In a
recent white paper, titled "Rethinking Macroeconomic Policy" IMF Chief
Economist Olivier Blanchard, along with Giovanni Dell Ariccia and Paulo Mauro,
suggested that central banks should increase the inflation target to 4%
during the good times to leave more room for nominal rate cutting during bad
times. This implies that monetary policy can be more effectively used during
tough times as seen in the case of current financial crisis.
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