What Kind Of Inflation Targeting Is Considered The Most Accepted In The Eu Economies?

Abstract

This study aims to identify the optimal inflation target for the European Central Bank (ECB). It will argue that the current definition of price stability and thus, the target of 2% yearly increase in HICP is not relevant according to our macroeconomic projection in Eurozone. This study argues that very low inflation rates for the last years may signify a threat of deflation. Specifically, the study argues for asymmetric inflation targeting and recommend the ECB to reformulate its inflation target as “close to 2.5% from below and above”. This has to be done in order to counter possible deflation, lower unemployment, avoid the liquidity trap, and give more room for the ECB to conduct its macroeconomic policy under the threat of recession. It is also briefly illuminated some other benefits of higher inflation, such as the option of negative interest rates, seigniorage and money illusion, and the corresponding of the costs associated with higher inflation of 2.5%, such as shoe leather costs, menu costs, tax distortions and uncertainty due to price variability. It is assumed that the outcome of Cost-Benefit analysis for a 2.5% inflation target is not very different from that for a 2% level, while a greater increase in inflation target would produce unclear results.