Inflation targeters: yer doing it wrong!
Recent experience has led some people to argue that central bank inflation targets should be raised above their 2% levels in order to better accommodate the problems of monetary policy at the zero interest bound.
Not so fast, say Uribe and Schmitt-Grohe in their new NBER Working Paper, "The Optimal Rate of Inflation" (ungated version available here)
The central goal of this chapter is to investigate the extent to which the observed magnitudes of inflation targets are consistent with the optimal rate of inflation predicted by leading theories of monetary nonneutrality. We find that consistently those theories imply that the optimal rate of inflation ranges from minus the real rate of interest to numbers insignificantly above zero. Our findings suggest that the empirical regularity regarding the size of inflation targets cannot be reconciled with the optimal long-run inflation rates predicted by existing theories. In this sense, the observed inflation objectives of central banks pose a puzzle for monetary theory.
And then there's this:
Furthermore, we argue that the zero bound on nominal interest rates does not represent an impediment for setting inflation targets near or below zero.
A paper on this topic by these authors would obviously be self recommending except that I have read it and am actively recommending it.