Hold Inflation Target Steady

Higher average inflation is associated with greater variability, thus making it more difficult for businesses and individuals to plan

Letter to WSJ. 

"Jason Furman suggests that the Federal Reserve should set a higher inflation target than the current 2% (“The Fed Should Carefully Aim for a Higher Inflation Target,” op-ed, Aug. 21).

But he never explains why hitting a higher target would be easier to hit than the current one. Many economists believe that a little inflation is a good thing because it essentially taxes idle balances that could be invested productively. But why so much higher than the current 2%?

Years ago a friend and I published a paper in a leading economics journal showing that, for a very large sample of countries, higher average inflation was associated with greater variability, thus making it more difficult for businesses and individuals to plan. A few years later we published a paper showing high average inflation rates or their variability led to much more volatile economic performance.

Surely, more volatility isn’t helpful. Keeping inflation low has worked for many years, why change now?

Em. Prof. Dennis E. Logue

Dartmouth College

Hanover, N.H."