Two of our Economics faculty, Jean-Paul L’Huillier and Raphael Schonle, were featured in Brookings Hutchins Center on Monetary and Fiscal Policy Roundup. Here’s an excerpt of the feature:

“Persistently low inflation leads to lower nominal interest rates and limits the monetary space—how much nominal rates can be cut—that central bankers have to fight a recession. Some economists argue that a higher inflation target could create more monetary space by increasing inflation, and thus nominal interest rates. Jean-Paul L’Huillier of Brandeis and Raphael Schoenle of the Federal Reserve Bank of Cleveland find that monetary space does not respond one-for-one to an increase in the inflation target: a 2-percentage point increase in the inflation target would only generate 1.28-percentage points of monetary space; to get the intended 2 percentage points of space, the inflation target would need to increase about 3 percentage points. Firms adjust prices more frequently when inflation is higher, the authors reason, therefore monetary policy is less effective, and central banks must respond more aggressively. As a result, the optimal inflation target needs to be approximately 1 percentage point higher to account for the loss of potency.”

To learn more about our faculty research, you can read their working paper on this topic here.


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