Moreover, central banks have shown during the crisis that they can choose from a repertoire of unconventional measures to further loosen the monetary policy stance when interest rates are already close to zero – although some of the unconventional measures are more problematic than others. What is more, results from macroeconomic models advise against inflation targets of more than 2%.
The optimal inflation rate derived from such models is around 2% – if the ZLB is explicitly taken into account. What is the underlying intuition for this result? Higher inflation targets reduce the risk of being restricted by the ZLB. But while these events are rather rare, higher inflation targets actually increase the welfare costs of inflation – period by period!