Inflation targeting aims to create certainty in people's minds about what inflation should be, by increasing interest rates when inflation is rising, and decreasing them when it is falling.

Even more certainty could be created by reducing the number of possible interest rates to two: the low interest rate applies when inflation is on target, and the high rate applies when it is higher than the target.

More certainty's got to be a good thing, right?
-- FishFinger, Nov 27 2008

Wikipedia: Inflation targeting http://en.wikipedia...Inflation_targeting
[jutta, Nov 27 2008]

//More certainty's got to be a good thing, right?//

Not sure. Could be.
-- Jinbish, Nov 27 2008


Inflation is caused by lending, most of which is long term stuff like mortgages. It takes years for an adjustment in interest rates to make much difference to inflation. It has been described as like steering an ocean liner by sticking one oar over the side. It is even more difficult than that, as at least you can tell exactly when a ship is pointing the right way, whereas it is hard to measure inflation precisely.

This means it is best done by highly experienced economists. They have to guess the right rate far in advance of its effect on inflation. Being limited to two arbitrary rates would just make it harder for no real reason.
-- Bad Jim, Nov 27 2008


(-) The difference between your scheme and the current practice is more than just lower resolution. You're mapping a relative change (lowering and raising interest rates) to an absolute change (low vs. high) - once the central bank has lowered the interest rate once in your scheme, it's out of options.
-- jutta, Nov 27 2008


Rate options of 0% and 1000% would solve that problem. Steering an ocean liner with either full rudder port or full rudder starboard.
-- Texticle, Nov 27 2008


Nobody would borrow at 1000%. Nobody is borrowing now, but for a different reason: nobody wants to lend.

Either way, it wouldn't help.
-- Spacecoyote, Nov 27 2008



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