David Wessel provides "Alternatives to the Fed’s 2 percent inflation target" for Brookings
David Wessel's latest Brookings Report is out now.
❝ Congress charges the Federal Reserve with pursuing “maximum employment” and “stable prices,” but leaves it to the Fed to define those terms. When Alan Greenspan was Fed chair, he once defined price stability as “that state in which expected changes in the general price level do not effectively alter business and household decisions.” In other words, he meant inflation (the change in the prices of goods and services) should be low enough so people don’t think about it in their economic lives. Over the past couple decades, central banks around the world have put a number on that inflation rate—around 2 percent. That was thought to be close enough to zero to be plausibly defined as price stability, especially given the tendency of official price measures to overstate increases in the cost of living, but high enough to ward off unwelcome bouts of deflation or falling prices. Once a few central banks embraced a 2 percent target, it was easier for the rest to pick that number, too. (“[T]he 2 percent target acquired the great advantage of conventionality: central banks could not easily be accused of acting irresponsibly when they had the same inflation target as everyone else,” economist Paul Krugman has noted.) [Brookings.edu]
| DAVID WESSEL is Director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institute & a contributing correspondent to the Wall Street Journal. Watch him dissect the high-stakes politics of the federal budget below, and learn more about booking David for your next event today. |
