Summary of "The Inflation Target at the Zero Lower Bound"

Authors

• Siddhartha Chattopadhyay, Department of Humanities and Social Sciences, IIT Kharagpur
• Betty C. Daniel, Department of Economics, University at Albany – SUNY

Publication Date

• July 31, 2014

Abstract

The paper proposes the adoption of an inflation target as a dynamic policy instrument at the zero lower bound (ZLB) to mitigate the effects of severe adverse shocks. The authors argue for the flexibility of the inflation target, similar to the rigid adherence seen in periods away from the ZLB, to enhance monetary policy effectiveness during economic downturns.

Key Points

• Inflation Targeting at ZLB: The concept involves using inflation targeting not as a fixed goal but as a variable tool to navigate economic challenges when interest rates are at or near zero, limiting traditional monetary policy tools.
• Policy Recommendation: The authors suggest that monetary authorities should adjust their inflation targets in response to significant economic shocks, aiming to stabilize the economy by indirectly influencing expectations and spending behaviors.
• Economic Rationale: By adjusting inflation targets upward in times of crisis, central banks could signal their commitment to stimulating the economy, potentially encouraging spending and investment through the expectation of higher future inflation.
• Empirical Analysis: The paper includes an analysis of historical economic data to support the argument that a flexible inflation target could serve as an effective policy instrument during periods of economic stagnation or deflationary pressures.

Conclusion

Chattopadhyay and Daniel advocate for a more dynamic approach to inflation targeting at the ZLB, suggesting that such a strategy could offer a viable path to economic recovery and stability in the face of severe downturns. The paper calls for further research into the optimal application and potential impacts of this policy recommendation.