IMF paper highlights risks of higher inflation targets

IMF headquarters in Washington DC

A working paper, published by the International Monetary Fund (IMF) in July, analyses whether central banks should increase their inflation targets to promote growth, suggesting the net impact on welfare is negative.

The author, Etienne Yehoue, uses a representative-agent general equilibrium model based on money demand curves derived from US data over the period 1900–2006 to evaluate the welfare effects. The paper finds that an increase in the inflation target from 2–4% reduces real income by 0

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