It may also be difficult for an individual central bank to raise the inflation target alone as long as an international debate is underway on whether or not a higher target would be advantageous. 13 There may be reason to wait for a reasonable degree of consensus among central banks and in the research community. If the conclusion were reached that raising the inflation target would be justifiable, this would probably also increase the possibility that several central banks would simultaneously decide to do so. This would probably further increase confidence for such a measure. Greater acceptance of falling short of the target? If monetary policy should now turn out to be less effective in the period ahead than it has been historically, one consequence could be that the central banks would be forced to accept below-target inflation for longer periods of time. This would make it important to try to create acceptance for this among households, companies and market participants, so that these do not start to believe that the central bank has abandoned the inflation target. Expectations among economic agents would thus play a completely central part in this. The problem can be illustrated, in a stylised manner, with the use of Figures 3–5. To maintain the credibility of an inflation target, inflation cannot be allowed to deviate from the target indefinitely. Economic agents can tolerate a deviation in the short term, but, the more time that passes, the closer to target inflation has to be to maintain confidence.
This also applies to the temporarily restricted autonomy and flexibility when a central bank must act resolutely in certain situations to maintain confidence in the inflation target. So far, it is my assessment that this is something transitory. Different theories behind the weak recovery from the financial crisis One notable theory for the reasons behind the low interest rates and the sluggish recovery from the financial crisis is the hypothesis of secular stagnation advanced by Summers (2013). The concept here is that a chronic surplus of saving has arisen in the world for various reasons, and that this has pushed the interest rate down. The problem, however, is that not even the current low level of interest rates creates a balance between supply and demand. The result of this is the risk that many countries will become stuck in a situation with too low aggregate demand, resource utilisation below normal and inflation that tends to be much too low. Rogoff (2015) instead argues that growth is being restrained by the world being in an adjustment phase of an unusually large debt cycle, a “debt supercycle”. Even if the level of interest rates is unusually low, this needs not mean that countries are stuck in a situation of chronic demand deficit. Demand and growth will start to pick up when the debt situation again normalises. Unlike a case of secular stagnation, which can be regarded as a structural phenomenon, the problems are thus assumed to be of a basically cyclical, albeit long-term, nature.