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!
To quote a paper by Coibion and co-authors: "(…) raising the inflation target is too blunt an instrument to efficiently reduce the severe costs of zero bound episodes. "9 A key point from an economic policy perspective, though, is this: Behind the low interest rates are the low inflation pressure and the modest growth outlook – not only in the euro area but worldwide.