“Why be happy when you could be normal?”
In a recent press conference, US Federal Reserve (Fed) Chair Janet Yellen suggested the Fed was open to the idea of increasing its inflation target. The debate about the optimal inflation target has been simmering among academics for some time. Until now, however, the leadership of the Fed has been fairly dismissive of the need to reconsider its target.
So Yellen’s call for more “research by economists that will help inform our future decisions” marks a significant moment. What is the case for a higher inflation target, and what are the costs to its implementation?