Core Viewpoint - The establishment of a 2% inflation target by central banks is rooted in historical economic lessons and practical considerations, originating from New Zealand's experience in the late 1980s [2][4][20] Group 1: Historical Context - New Zealand faced severe economic issues in the 1980s, including high inflation exceeding 10%, leading to significant reforms aimed at stabilizing the economy [2][4] - The Reserve Bank Act of 1989 mandated that the central bank's sole focus was to maintain price stability, resulting in the first inflation target of 0% to 2% [4][6] - This model inspired other countries, with Canada, the UK, and the European Central Bank adopting similar targets in subsequent years [6][10] Group 2: Economic Rationale - A 2% inflation target serves as a buffer against deflation, allowing for more flexible monetary policy, as nominal interest rates cannot fall below zero [8][10] - The target helps manage nominal rigidity, particularly in wages, allowing for real wage adjustments without nominal cuts [10][20] - It also accounts for measurement biases in consumer price indices, which often overstate inflation, making a 2% target effectively closer to a 1% real inflation rate [10][20] Group 3: Global Adoption and Variations - Over 40 central banks globally have adopted similar inflation frameworks, with variations based on local economic conditions, such as China's flexible approach and India's target of 4% ± 2% [6][13][20] - The 2% target has proven effective in stabilizing economies, as seen in the U.S. and Japan, where it helped navigate through economic downturns [11][17] Group 4: Current Debates and Future Considerations - Recent discussions among economists suggest reevaluating the 2% target due to changing global dynamics, including supply chain disruptions and rising energy prices [15][20] - Some propose increasing the target to 3% or 4% to provide more policy space, while others caution against the risks of higher inflation impacting lower-income populations [15][20]