The recent review of the Federal Reserve’s monetary policy strategy, and the ongoing review at the ECB, has reignited the debate about central banks’ optimal inflation targets as well as their wider objectives. As near-zero policy rates hinder the effectiveness of monetary policy, one issue that has often come up is whether central banks should raise their current inflation targets to prevent the effective lower bound (ELB) from ‘binding’ in the future. But a higher target carries costs associated with more volatile (and higher) inflation on average. Further, recent events (as well as long-term trends) have raised questions on what might be the right balance between price stability and central banks’ other objectives. The IGM Forum (IGM 2020) and the CFM survey (CFM 2020) have recently polled leading academics on these topics.
We contribute to this debate by analysing the answers to an extensive global survey of leading researchers in economics and finance. The survey asked respondents for their views on the optimal inflation target and other related issues. From a sample of approximately 6,000 individuals, we received 613 responses, of which 159 came from the euro area and 241 from the US.
About 80% of the respondents considered themselves as either experts or knowledgeable in issues related to monetary policy. Around 40% reported macroeconomics and monetary economics as their primary field of expertise. Their average academic experience in the sample is 24 years.
Most support is given to inflation targets similar to the status quo
We first examine whether respondents prefer an inflation target that may differ from what the central bank currently has in place. Because not all central banks have the same inflation target, we first asked the respondent to provide the current inflation target of the central bank in question (if it has one). We then asked whether the respondent prefers the central bank to have an inflation target and, if so, their preferred one. Throughout the survey, we gave respondents instructions to consider the central bank responsible for monetary policy in their own country of residence.
A great majority (525 respondents) come from countries or regions with an inflation targeting central bank. In this pool, 228 respondents support the central bank’s current inflation target, while 188 respondents prefer a different one.1 About two-thirds of the latter group (124 respondents) prefer a higher target while 64 respondents prefer a lower target. The median respondent of those who want a higher inflation target prefers the target to be one percentage point higher than the central bank’s current target. Similarly, the median respondent of those who want a lower inflation target prefers the target to be one percentage point lower than the central bank’s current target. Figure 1 summarises these results.
Figure 1 Preferred inflation target vs current target in countries with an inflation-targeting central bank2
In the euro area and in the US – where the central bank currently targets (approximately, in the case of euro area) a 2% inflation rate – the average preferred inflation target is slightly above 2% in both regions, with responses ranging from 0% to 5% in the euro area and 0% to 4% in the US.
Many respondents support that central banks aim for more than just price stability
We also asked more generally about central bank objectives and observable policy targets. In what follows we report the results separately for the euro area and the US. Results for the entire global sample are broadly in line with the ‘weighted-average’ views of these two groups.
As Figure 2 shows, in both regions roughly 80-90% of respondents prefer the central bank to have either (a) price stability and other objectives with equal weights or (b) price stability and subordinate objectives. In the euro area, these two options obtain even support. In the US, 60% of the respondents prefer ‘option a’. Support for the sole price stability objective is 9% in the US and 16% in the euro area. It should be noted that the prevailing mandates of both the ECB and the Federal Reserve contain reference to other objectives in addition to price stability.3
Figure 2 What should the central bank’s objective(s) be?
Regarding observable targets for a central bank’s monetary policy, Figure 3 shows that a combination of the inflation rate and unemployment rate is the most popular option among respondents both in the euro area (45% support) and the US (51% support). This option is followed by aiming for the inflation rate as the sole target, which obtained 38% support in the euro area and 24% support in the US. Price level, the level of nominal GDP, and the growth rate of nominal GDP, each obtained 1%-7% support in both regions.
It is also interesting to note that although a great majority of respondents prefer the central bank to have more than one objective, support for two observable targets (i.e. inflation rate and unemployment rate) is not quite as high.
Figure 3 What are the most preferable observable targets for the central bank?
Inflation targeting central banks are viewed as unlikely to hit their targets
We conclude this brief overview of our survey results with respondents’ views on the likelihood that the central bank will achieve its inflation target over the next three years (i.e. medium term). The respondents were asked to assess this likelihood on a scale from ‘1 = very unlikely’ to ‘5 = very likely’. If we denote respondents who answered with either four or five as ‘optimists’, and those who answered either one or two as ‘pessimists’, we see in Figure 4 that in the euro area pessimists outnumber optimists by 60% against 20%. In the US, the margin is smaller, at 41% against 31%.
Figure 4 How likely is the central bank to achieve its inflation target (over the next three years)?
Our survey data suggest that the most common view among respondents is to leave the current inflation target unchanged. This result is broadly in line with the CFM Surveys (2020) which focused on the ECB. We also find strong support for central banks to explicitly have other objectives (such as unemployment) in addition to price stability. Our survey contains a host of additional information that we plan to investigate within future research.
Authors’ note: The authors would like to thank colleagues at the Bank of Finland, especially Jarmo Kontulainen, Juha Kilponen, and Tuomas Välimäki, as well as Guido Ascari, Wouter den Haan and George Pennacchi for valuable comments and suggestions. They are indebted to Jonna Elonen-Kulmala for the implementation of the survey and Minna Nyman for research assistance. The usual disclaimer applies.
CFM (2020), “Should the ECB reformulate its inflation objective?”, Centre for Macroeconomics, 2 November.
IGM (2020), “Fed Strategy. The Initiative on Global Markets”, Chicago Booth, 16 September.
1 The rest either do not prefer the central bank to have an explicit inflation target or had no opinion on the numerical inflation target.
2 Some respondents qualified their numerical answer with verbal explanations or by giving a numerical range instead of a fixed number. While these differences are interesting to analyse as such, the results here are based on standardized answers such that e.g. a numerical range has been replaced by the midpoint of the range. Similarly, approximate current inflation targets such as the ECB’s “close but below 2%” have been standardized to the closest integer, e.g. 2% in the case of the ECB.
3 See the Treaty on the Functioning of the European Union, Article 127 (1) and the Federal Reserve Reform Act of 1977, respectively.