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Why central banks target a positive rather than zero inflation?
Horák, Petr ; Potužák, Pavel (advisor) ; Slaný, Martin (referee)
This bachelor thesis deals with the reasons why central banks set inflation targets positive and not zero. The central bank has three main reasons for positive target. One results from inaccurate measurement of inflation by CPI, which overstates inflation. Economists don't concur about size of this upper bias, but that is surely significant. Another reason for the positive inflation target may be asymmetric nominal wage rigidity. Again, there is not consensus about existence of wage rigidities, but in this case, possible impact of nominal wage rigidities on the optimum inflation is very limited. The last main reason is the fear of achieving the zero lower bound of nominal interest rates, and thus the inability to stimulate economy by lowering interest rates. Central banks have also less conventional tools of monetary policy, and therefore the fear of achieving the zero lower bound may be exaggerated. The result of economic models is optimum inflation in a range from negative to marginally positive, thus considerably less than usual inflation target.
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