25 The figure is taken from Andersson and Claussen (2017), who review different alternatives to inflation targeting. 12 [24]  negative supply shock may already have affected production and employment negatively and as monetary policy must also be tightened, the effect can be noticeable. This can make it difficult for the central bank to credibly commit itself to such a strategy. However, in the variation proposed by Bernanke, the central bank would not always have a price level target, but only when the interest rate has been cut so low that the lower bound is binding – it will thus be a temporary price level target. 26 In normal cases the central bank will have an ordinary inflation target of 2 per cent, just like today. The central bank’s communication can in this way continue to focus on the inflation target. At the lower bound the temporary transition to a price level target can be explained and communicated in terms of keeping the policy rate at the lower bound until the average inflation since the date at which the policy rate first hit zero be at least 2 percent. 27 One advantage with a price level target that is only applied at the lower bound is that one avoids the problem of needing to compensate for supply shocks that temporarily push up inflation, which one would need to do if the price level target always applied.
When it comes down to it, the inflation-targeting policy has functioned well for a long time, and problems only arose when there was difficulty making policy sufficiently expansionary, as a result of the lower bound, after the financial crisis. Raising the target would solve, or at least reduce, this problem. It would also only affect one parameter of the framework and would not entail any extensive revision of it. This means it would not be necessary to try to convince and explain the merits of a new system and deal with potential adjustment costs and teething problems. It is not always an advantage to hold on to as much of an old system as possible, but in this case I think it would be a good idea. Would the economic agents accept an inflation rate of 3-4 per cent? I think they would, especially as it would entail less of a negative interest rate in the future – something we now know from experience is perceived as unnatural and problematic in several ways. It could also reasonably mean that it would be less probable that one needs to employ purchases of various financial assets as a complement to policy rate cuts. Although the criticism of this part of the policy may not have been as sharp as the criticism of the negative interest rate, it has still arisen.