Should central banks fight to bring inflation back to 2%?
In the United States, in the euro zone and Japan, central banks are "fighting" to bring inflation back to 2%, which is why interest rates have been abnormally low for a long time. Should central banks have this behaviour? The usual argument in favour of a return of inflation to 2%, and the rejection of inflation remaining at 0% or 1%, is that if the inflation that central bank accepts is low, nominal interest rates at equilibrium are low, and since nominal interest rates must remain positive, the leeway in order to lower interest rates in the event of recession is very limited. It is also argued that if inflation is low, since nominal wages cannot decline, the margin for adjustment of real wages becomes very limited. But in reality, 0% is not a magical level for inflation or interest rates: The zero lower bound of nominal interest rates is only due to the fact that there are financial assets (banknotes, sight deposits) paying a zero interest rate; if these assets disappear (changeover to electronic money, possibility of a negative interest rate on sight deposits), the zero lower bound of interest rates would also disappear; Zero or negative inflation would be perfectly acceptable if there was no nominal rigidity, in particular if it was possible for nominal wages to decline (to prevent an abnormal rise in real wages in case of negative inflation). Central banks’ current combat, with the resulting dangers, is therefore only due to the existence of money paying an interest rate of zero and nominal wage rigidity.