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Assistant Professor of Economics Examines the Optimal Inflation Target for the Central Bank
Andres Blanco knew that he wanted to work within the United States after completing his PhD at New York University and entering the job market. After comparing competing offers, UM Economics stood out as the exemplary choice. Since beginning at UM, Andres has found trustworthy leadership and an amazing group of faculty that created an environment of collaboration, including his advisor from NYU. It didn’t hurt that Ann Arbor is an incredibly walkable city, a necessity to someone tired of long subway rides.
Andres is an assistant professor of economics whose primary field of interest is macroeconomics. His research specialty is monetary economics. He explains in a recent paper, “The main question I ask is, ‘what is the optimal inflation target that a central bank should have?’ After the 2007 recession, what happened in the world is that the central banks could not decrease the interest rate because of the zero lower bound on nominal interest rate. Therefore, they could not activate the demand and that caused a big recession. Because of this, several economists said we should increase the inflation target. The main idea is that a higher inflation target increases the average interest rate, and therefore central banks have more room to reduce it." In his paper, he shows that this policy stabilizes the business cycle, and that the society will greatly benefit from a higher inflation target.
Andres sees the optimal target inflation rate being around four percent in a micro-founded model consistent with micro-data about firm pricing behavior. Based on his model he claims: “If you see history, Central Banks chose a 2 percent inflation rate randomly instead of using a clear, coherent argument. I’m trying to use economic theory and data to try to get a certification of this number. The main idea that I have is that the business cycle is costly because it generates unemployment and drops consumption. It would be better to have a higher inflation on average so that the fed has more power to decrease the interest rate during a recession and therefore activate the economy.”
When beginning a new project, Andres always begins with one question. However, instilled in him while earning his PhD, was the importance of not constraining yourself to answer that first question. He recommends that researchers “start with that one question and work back from there to get more questions.” This method of thinking is just one tool of many that Andres provides to students to help them solve important economic problems.
To read more about Andres and his work, check out his homepage!