A hike in inflation targets seen as a cure for stubbornly low inflation

A group of economists, including former Central Bank of Ireland chief Patrick Honohan, has spoken in favor of raising central banks' inflation targets to meet their price stability mandates and boost their economies.

The latest Geneva Report on the World Economy:

Although policymakers have tools for stimulus at the lower bound, these may not always be enough. We therefore also consider adjusting policy frameworks to reduce the risk that nominal rates hit zero. Of the many proposals out there, the most obvious and simplest of such adjustments would be a modest increase in central banks’ inflation targets.

Perhaps the most common reason that policymakers have resisted raising the inflation target is the concern that credibility will suffer. We believe this concern is unwarranted and misplaced. Central banks should seek credibility for their commitment to meet their ultimate goals – full employment and price stability – not for their commitment to a particular number for the inflation target. A greater risk to central bank credibility may be the protracted inability to meet their mandates at the current low targets, due to the lower bound constraint.

The paper joins a raft of academic publications offering suggestions on how to prevent central banks from becoming increasingly impotent to deliver on their promise to engineer 2 percent inflation when interest rates have reached the zero lower bound.

True that the inability of central banks, in many developed countries around the world, to meet their declared 2 percent objectives poses a clear credibility threat.