The inflation target trap
Wednesday, July 12, 2017
But central banks have set the goal of achieving an inflation rate of “below, but close to 2%,” as the European Central Bank puts it. And, at this point, it is hard to see how that can be achieved.
Central banks never pretended that they could steer inflation directly. But they thought that by providing rock-bottom interest rates and generous liquidity conditions in the wake of the 2008 global financial crisis, they could push investment and consumption upward. In 2009, when financial markets were in turmoil and the economy was in free-fall, the US Federal Reserve took matters a step further, initiating large-scale asset purchases, or quantitative easing (QE). The ECB followed suit in 2014-2015, when deflation appeared (wrongly, in hindsight) to threaten the eurozone.
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