Does Low Inflation Pose a Risk to Economic Growth and Central Banks Reputation?

Publications

24 Mar 2020

Trade & Macro

CASE Reports

Inflation in advanced economies is low by historical standards but there is no threat of deflation. Slower economic growth is caused by supply-side constraints rather than low inflation. Below-the-target inflation does not damage the reputation of central banks. Thus, central banks should not try to bring inflation back to the targeted level of 2%. Rather, they should revise the inflation target downwards and publicly explain the rationale for such a move. Risks to the independence of central banks come from their additional mandates (beyond price stability) and populist politics.

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Does Low Inflation Pose a Risk to Economic Growth and Central Banks Reputation?

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