That's why many central banks have an inflation target of around 2 percent. People buy too much now to avoid paying higher prices later.
This causes businesses to produce more to take advantage of higher demand.
These questions have arisen more urgently as the Fed has struggled to right the US economy after the financial bubble that burst in September 2008 with the collapse of Lehman Brothers, a highly leveraged investment bank.
Monetary policy, however, is ill-suited to achieving these goals.
The next Fed chair needs to turn the rising tide of dissatisfaction with Fed policy by returning it to its primary purpose of controlling inflation and reducing uncertainty.
They also analyze the effects of assuming that every financial crisis leads to output losses and deflation as catastrophic as in the Great Depression of the 1930s—again, a very strong assumption.
In this case, a short-term interest rate 30 to 75 basis points higher than it otherwise would be could pass a cost-benefit test.