Econobrowser has a nice post in which he invites three young leading macro-economists to post on the topic of whether the Fed's inflation target is too high or not.
Predictably, however, the post was a total disappointment. According to the authors calculations, "The optimal inflation rate implied by the model is 1.2% per year."
Wow. That's pretty low, isn't it? The authors, predictably, do not grasp that if the Fed predicts 1% inflation and does nothing to get us to the "target" of 2%, then for all intents-and-purposes, we've got a 1% inflation rate. There is also no discussion about what I believe -- that the lower bound only matters because Ben Bernanke has a personal distaste for QE. They also write that if the Fed set an inflation target of 0%, then the zero lower bound would bind 15% of the time. This sounds highly suspicious. With a 3.5% target, we'd be in liquidity trap territory 4% of the time. (Is liquidity trap prevalence really so insensitive to the target??? That sounds pretty incredibly to me...) The authors also write that "raising the target rate from 1.2% to 4% per year is equivalent to permanently reducing consumption by nearly 2%." Again, color me suspicious that inflation is that costly given that w/ a 4% inflation target, we would not now be stuck in a deep recession... This implies shoe-leather costs of inflation are on the order of 3-4%. In any case, I think a 4% target is much too high. If I were Chairman Bernanke, I might raise the target to 2.5%.
I have a strong suspicion that this "economic research" is driven by priors and numbers which have largely been made up.
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