In 2010, Olivier Blanchard, who at the time was chief economist at the International Monetary Fund, committed economic heresy by suggesting the inflation targets of central banks should be set at 4 percent, two percentage points higher than what had become the global convention. Central bankers in advanced countries were performing all sorts of real-time experiments with monetary policy to stave off deflation. Blanchard reckoned that if the Federal Reserve, the Bank of Japan and others had been willing to accept higher inflation ahead of the financial crisis, they would not have been backed into a corner so quickly by the forces the crisis left in its wake.
“It remains a fact that compared to conventional policy, the effects of unconventional monetary policy are very limited and remain uncertain,” Blanchard wrote in a blog post in 2013. “There is therefore much to be said for avoiding the trap in the first place in the future, and it raises again the question of the inflation rate. There is wide agreement that in most advanced countries, it would be good if inflation was higher today. Presumably, if it had been higher pre-crisis, it would be higher today. To be more concrete, if inflation has been 2 percentage points higher before the crisis, the best guess is that it would be 2 percentage points higher today, the real rate would be 2 percentage points lower, and we would probably be close in the United States to an exit from zero nominal rates today.”
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