Economic Quarterly

October 12, 2011

Richmond Fed's Economic Quarterly Analyzes the Effects of a Higher Inflation Rate Target

Richmond, Va.

Bennett T. McCallum of Carnegie Mellon University and the National Bureau of Economic Research and a visiting scholar at the Richmond Fed discusses whether central banks should set higher inflation targets, such as 4 percent rather than 2 percent. Some economists have argued that because providing monetary stimulus when interest rates are at the zero lower bound is more difficult, central banks should consider increasing their inflation rate targets. McCallum notes that the benefits of providing additional monetary stimulus at the zero lower bound must be weighed against the costs of maintaining higher inflation outside of that scenario. To make that comparison, he explores pertinent research and theory, including Milton Friedman’s “optimal quantity of money” result, New Keynesian literature on resource misallocation caused by price stickiness that affects only some sellers, and the contention that the zero lower bound does not necessarily constitute a limit to monetary stimulus.

You can find the full text of this article and others in the latest issue of Economic Quarterly at:

Also in the Second Quarter 2011 issue:

  • Financial Firm Resolution Policy as a Time-Consistency Problem by Borys Grochulski
  • Sectoral Disturbances and Aggregate Economic Activity by Nadezhda Malysheva and Pierre-Daniel G. Sarte
  • Legal Protection to Foreign Investors by Juan Carlos Hatchondo and Leonardo Martinez

The Economic Quarterly is a free publication containing economic analysis pertinent to Federal Reserve monetary and banking policy. For free copies or more information, contact the Federal Reserve Bank of Richmond’s Research Department--Publications at 800.322.0565 or visit

The Richmond Fed serves the Fifth Federal Reserve District, which includes the District of Columbia, Maryland, North Carolina, South Carolina, Virginia and most of West Virginia. As part of the nation's central bank, we're one of 12 regional Reserve Banks that work together with the Federal Reserve's Board of Governors to strengthen the economy and our communities. We manage the nation's money supply to keep inflation low and help the economy grow. We also supervise and regulate financial institutions to help safeguard our nation's financial system and protect the integrity and efficiency of our payments system.


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