High inflation targets crucial to prevent deflationary spirals, study finds.
The article explores how a central bank's credibility affects its ability to control inflation. Using a model with different types of expectations, the researchers show that having diverse expectations allows for more policy options. They find that with the right monetary policy, the economy can reach the central bank's goals. However, when interest rates hit zero, deflationary spirals can occur, but these can be avoided with a high inflation target or aggressive monetary easing.