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Targets

We are frequently told that there are various targets of monetary policy. These targets include (but are not limited to) an inflation rate, an interest rate, the shape of the yield curve, and even a rate of money growth.

So what is the problem?

We have one bullet, monetary policy. How many targets should we be required to hit?

What target is the appropriate ONE?

I might be able to make a case for an inflation rate target. If so, I might fall in line with the majority of economists who think that 2% is an appropriate target for the United States. This is an empirical point. Take a look at the fundamental graph on this site. Note that the rate of real economic growth may be maximized at this rate of inflation. I should emphasize that a rate of 2% does not guarantee that the rate of real economic growth will be maximized.

A different rationale for a slightly positive inflation rate target is found in the idea that a little deflation is worse than a little inflation. If we cannot precisely hit the center of a target (read the hubris page), it seems wise to set the target at a little inflation rather than at zero inflation. This target reduces the cost of error.

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