That 2% inflation target isn't some magic economic number—it’s basically a bribe to keep governments from printing too much cash.
Most people assume the 2% target is a scientifically optimal number for growth. This research suggests it is actually a political bargain that allows central banks to profit from printing money (seigniorage) while providing a low enough cap to prevent public backlash, regardless of what the math says is best for the economy.
Two Percent is a Bargain
SSRN · 6337738
Most central banks in the developed world have a two percent inflation target, or at least a target range that includes two percent. It is unclear why this is the case. A two percent inflation rate is below the typical seigniorage-maximizing rate, but it is above most estimates of optimal inflation found in the literature. In this paper, I argue that the two percent inflation target is the result of a political bargain. In particular, I appeal to a price theoretic interpretation of the core, app