Some IPE bloggers seem to be reading a lot into a recently-released IMF Staff Position Note. In this note, IMF chief economist Oliver Blanchard and his co-authors consider the lessons we might draw from the recent crisis about the pre-crisis consensus on macroeconomic policy. One lesson he suggests is that a slightly higher inflation target (4 rather than 2 percent) might make it easier to cut rates in the face of large negative shocks. Let me quote the relevant section at length:
The crisis has shown that large adverse shocks can and do happen. In this crisis, they came from the financial sector, but they could come from elsewhere in the future—the effects of a pandemic on tourism and trade or the effects of a major terrorist attack on a large economic center. Should policymakers therefore aim for a higher target inflation rate in normal times, in order to increase the room for monetary policy to react to such shocks? To be concrete, are the net costs of inflation much higher at, say, 4 percent than at 2 percent, the current target range? Is it more difficult to anchor expectations at 4 percent than at 2 percent?
Achieving low inflation through central bank independence has been a historic accomplishment, especially in several emerging markets. Thus, answering this question implies carefully revisiting the list of benefits and costs of inflation (page 11).