How the 2% inflation target came about. No great economic research or deep thinking behind it.

The story of the 2% inflation target starts oddly in New Zealand. In 1989, New Zealand wanted to codify the independence of its central bank, and in this bill, it directed the New Zealand finance minister and head of its central bank to come up with an inflation target (Irwin 2014).

Once the bill became law, then an inflation target had to be chosen. In an off-hand remark in an interview, the former head central banker said the inflation target should be zero to 1 percent. However, Don Brash, the head of the central bank, claimed “It was almost a chance remark,” and “The figure was plucked out of the air to influence the public’s expectations ”(Irwin, 2014). They used this number as a starting point and pushed it up to 2% to give themselves a bit more room.

sites.lsa.umich.edu - Why the inflation target