Marc Dordal i Carreras, Olivier Coibion, Yuriy Gorodnichenko, Johannes Wieland, 21 September 2016

Models that estimate optimal inflation rates struggle to accurately account for interest rates reaching the zero lower bound, due to the lack of historical data available. This column suggests periods of hitting the zero lower bound are longer than previously thought, and models the optimal inflation rate target on this. Given the uncertainty associated with measuring the historical frequency and duration of such episodes, the wide range of plausible optimal inflation rates implies that any inflation targets should be treated with caution.

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