As the global financial crisis unfolded, Bernanke found himself at the receiving end of similar advice when Blanchard et al.3 and Krugman4 had, separately and independently, argued that the Federal Reserve should raise its inflation target from 2 per cent to 4 per cent in order to give itself larger head room for conventional monetary easing and thereby avoid, or at any rate delay, recourse to unconventional monetary easing.
Quantitative estimates have reinforced this argument by showing that at an inflation target of 4 per cent, the probability of the Fed Funds Rate touching zero is less than 1 per cent. The Fed has, however, resisted this call for a higher inflation target by arguing that this exposes the economy to the risk of higher inflation by unhinging inflation expectations.5 26.