If the U.S. economy had begun with higher average inflation and thus higher short-term nominal interest rates when entering the recession, the Federal Reserve could have lowered the interest rate more and thereby reduced the drop in output and deterioration of fiscal positions.
Dr. Blanchard subsequently suggested that a higher inflation target up to about 4 percent could be pursued in normal times and that medium- to long-term inflation expectations should be anchored at that level – up from the current level of 2 percent.