Inflation targeting Could Become Harder for central banks

Introduction

In a recent BIS paper, the authors find that prices of goods and services across advanced economies do not react to changes in the value of the exchange rate. For some, this is great news as citizens in advanced economies will be able to consume more with their incomes. However, central bankers are wary of this as they expect prices to rise gradually and average 2% in most countries. In fact, the ECB recently changed its mandate to target inflation at 2% despite failing to reach this target since the 2008 Great…