Inflation targeting is one of those rare policy frameworks that became near-universal orthodoxy and then, after a decade of below-target inflation followed by a sharp overshoot, came under sustained internal scrutiny. For Ireland, the relevant target is set by the European Central Bank — 2 percent over the medium term, symmetric — so the debate is not academic. This article surveys the main lines of disagreement inside the economics profession, without taking sides. The point is to show where credible economists hold different views, and why.
The orthodox position
The case for a 2 percent target rests on three propositions. First, a positive inflation rate avoids the zero lower bound more often than a zero target, giving central banks room to cut real rates in a downturn. Second, a clearly announced, credible target anchors expectations and reduces the cost of disinflation. Third, 2 percent specifically is low enough to be consistent with price stability in practical terms but high enough to allow relative price adjustment without nominal wage cuts. This position, associated with the Federal Reserve's original adoption and the ECB's later refinement, remains the official framework of every major central bank.
Defenders of the framework point to the 2021–2023 episode as evidence that the target works: inflation overshot, expectations became unmoored, central banks raised rates firmly and expectations re-anchered without a wage-price spiral becoming entrenched. The pain of disinflation, on this view, is the price of credibility, and the framework that delivered the re-anchoring should not be abandoned because of a single episode.
The case for a higher target
A prominent dissent, advanced before and after the inflation surge by economists including Olivier Blanchard and (in different form) by Lawrence Summers, argues that 2 percent leaves too little room above zero. A 3 or 4 percent target, on this view, would give central banks more space to cut real rates before hitting the lower bound, would reduce the frequency of unconventional policy, and would make the average inflation rate less sensitive to measurement bias. The pre-2020 decade — when major central banks undershot their targets for years and relied on quantitative easing and forward guidance to compensate — is cited as evidence that 2 percent is too low in practice.
The counter-argument is that raising the target after a period of above-target inflation damages credibility: if a central bank raises the target when inflation is high, the public may reasonably infer that the target is a ceiling to be moved, not a commitment to be honoured. Defenders of the orthodoxy also argue that the costs of the zero lower bound were overstated in the pre-2020 literature and that unconventional tools were effective, if imperfect.
The case for a lower or flexible target
A smaller group, including some monetary historians and a faction of the "sound money" tradition, argues that 2 percent is itself too high and that a 0 or 1 percent target, or a price-level target, would deliver better long-run price stability. Price-level targeting — where the central bank commits to a path for the price level, not its rate of change — has the property that a period of above-target inflation must be followed by below-target inflation to return to the path. The Bank of Canada's review process has considered this option seriously. The drawback is that the framework requires the central bank to tighten in a downturn to make up for earlier overshoots, which is politically and practically difficult.
Average inflation targeting, adopted in modified form by the Federal Reserve in 2020, is a compromise: it allows make-up inflation after undershoots but is less demanding of make-up deflation after overshoots. The framework is still being tested and the evidence on its performance is thin.
The framework debate is not just about the number
Beyond the target itself, economists disagree on three operational questions. First, the horizon: "over the medium term" is deliberately vague, and different central banks interpret it differently. A shorter horizon implies a more aggressive response to shocks; a longer horizon allows more tolerance of supply-driven movements. Second, the role of asset prices and financial stability: pre-2020 orthodoxy held that monetary policy should respond to inflation and output, with macroprudential policy handling financial stability; the post-2020 experience has reopened the question of whether prolonged low rates themselves generate fragility that monetary policy should acknowledge. Third, the symmetry of the target: a genuinely symmetric target requires the central bank to respond as vigorously to undershoots as to overshoots, and critics argue that in practice central banks were asymmetric — quicker to raise than to ease — which eroded the framework's credibility over the low-inflation decade.
"The target is the easy part. The hard part is the reaction function — what the central bank actually does when the target is missed, in which direction, and for how long." — A paraphrase of a recurring theme in the monetary policy literature.
What this means for Ireland
Ireland does not set its own inflation target; the ECB does. But the debate matters because ECB policy transmits to Ireland through mortgage rates, the exchange rate of the euro, sovereign spreads and the broader financial cycle. Irish-specific questions — the sensitivity of the heavily indebted household sector to rate rises, the exchange-rate exposure of the multinational export base, the interaction of ECB policy with the domestic fiscal position — are studied by the Central Bank of Ireland and the ESRI. The relevant Irish contribution to the wider debate is empirical: how does a small, open, multinational-heavy economy experience a common monetary policy designed for the average of the euro area?
Sources
Primary references are the ECB's Monetary Policy Strategy Review, the Federal Reserve's Statement on Longer-Run Goals, Blanchard, Dell'Ariccia and Mauro (2010) on higher targets, the Bank of Canada's renewal framework documents, and the Central Bank of Ireland's research bulletins. See our data sources page for institutional links.