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I have a question at the intersection of Economics and Politics.

Every country has her own inflation target. But who, how and on what basis is it determined? Of course, we know that too big inflation is bad and deflation is bad, but why it's around 2% (depending on a country) and not around 1% or 3% or any other? Maybe a little deflation (around 1%) would be better?

I am trying to understand why the inflation target is set to some exact value. What is the process of setting this value. Who is responsible for this task and what data does he work with.

Are there any scientific publications explaining the process of determining the inflation target?

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    $\begingroup$ Possible duplicate of Is zero inflation desirable? $\endgroup$ – EnergyNumbers Nov 17 '17 at 21:55
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    $\begingroup$ Unofficially, the story is that the initial countries to adopt 2% did so on the basis of back-of-the-envelope estimates. Once those countries targeted 2%, there is pressure for other countries to adopt the same target (since the theoretical fair values for currencies would be stable over the long term). On top of the answers in the other question, the Bank of Canada recently renewed its inflation-targeting mandate, and has reports discussing the options available, which might be a good place to look. $\endgroup$ – Brian Romanchuk Nov 19 '17 at 21:17
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Recently, at the 2017 Money and Banking Conference at Buenos Aires, the Governors of the Central Bank of Peru and Paraguay talked about this same thing. Those two countries successfully brought inflation from double-digits to ~2% in recent times and they said the changes were opportunistic: if they were sure they'd be able to meet the IT, they changed it.

Also, Peru has a constitutional amendment that allows for Peruvians to have a savings account in any currency they want and indeed around ~70% of deposits were in dollars which implies they aimed at something close to US' inflation.

This is in stark contrast to the host's (Argentina's) strategy, mainly to reach a 1-digit inflation around mid-2019, just before the presidential elections. The bands are:

  1. 14.5% ±2.5 for 2017 (they already failed, it will end up around 20%)
  2. 10.0% ±2.0 for 2018
  3. 5.0% ±1.5 for 2019.

While the targets are aggressive and they already surpassed this year's band, market's inflation expectations consistently have a downwards trend.

Finally, what's so special about 2%? An unexpected deflation has a negative short-term effect on growth. High inflation also has a negative effect on growth. So, being stable around 2% is a nice "Goldilocks" zone.

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