This study aims to identify the optimal inflation target for the European Central Bank (ECB). It will
argue that the current definition of price stability and thus, the target of 2% yearly increase in HICP is
not relevant according to our macroeconomic projection in Eurozone. This study argues that very low
inflation rates for the last years may signify a threat of deflation. Specifically, the study argues for
asymmetric inflation targeting and recommend the ECB to reformulate its inflation target as “close to
2.5% from below and above”. This has to be done in order to counter possible deflation, lower
unemployment, avoid the liquidity trap, and give more room for the ECB to conduct its
macroeconomic policy under the threat of recession. It is also briefly illuminated some other benefits
of higher inflation, such as the option of negative interest rates, seigniorage and money illusion, and
the corresponding of the costs associated with higher inflation of 2.5%, such as shoe leather costs,
menu costs, tax distortions and uncertainty due to price variability. It is assumed that the outcome of
Cost-Benefit analysis for a 2.5% inflation target is not very different from that for a 2% level, while a
greater increase in inflation target would produce unclear results

Inflation targeting, central banks,, , optimal inflation rate

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inflation”, Brookings Papers on Economic

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Apergis, N., Miller S., Vamvakidis A. (May,

“Inflation Targeting and Output

Growth: Empirical Evidence for the

European Union”, IMF working paper

/89.

https://poseidon01.ssrn.com/delivery.php

?ID=5090051001180960000211261070070

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Blanchard, O. and Johnson, D.R.

(2012), "Macroeconomics”, 6th edition.

Boston, MA, United States: Prentice Hall