Average Is Good Enough: Average-Inflation Targeting and the ELB

Amano, Robert; Gnocchi, Stefano; Leduc, Sylvain; Wagner, Joël

doi:10.24148/wp2020-21

Cited by 18 publications

(20 citation statements)

References 9 publications

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“…Only a handful papers in the literature study the Federal Reserve's new policy framework of AIT. For example, Amano et al (2020) examine the optimal degree of history dependence under AIT and find it to be relatively short. Mertens and Williams (2019) show that AIT can mitigate the effects of the zero lower bound by raising inflation expectations when inflation is low.…”

Section: Literaturementioning

confidence: 99%

Average Inflation Targeting: Time Inconsistency And Intentional Ambiguity

Jia

2021

Working Paper (Federal Reserve Bank of Cleveland)

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We study the implications of the Fed's new policy framework of average inflation targeting (AIT) and its ambiguous communication. We show that AIT improves the trade-off between inflation and real activity by tilting the Phillips curve in a favorable way. To fully utilize this feature and maximize social welfare, the central bank has the incentive to deviate from AIT and implement inflation targeting ex post. Next, we rationalize the central bank's ambiguous communication about the horizon over which it averages inflation. Ambiguous communication, together with uncertainty about economic fundamentals, helps the central bank to gain credibility and improve welfare in the long run, in spite of the time-inconsistent nature of AIT.

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Section: Literaturementioning

confidence: 99%

Average Inflation Targeting: Time Inconsistency And Intentional Ambiguity

Jia

2021

Working Paper (Federal Reserve Bank of Cleveland)

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“…Thus, if inflation has run persistently below two percent, the Committee will pursue inflation modestly above two percent for some time going forward. Mertens and Williams (2019), Amano et al (2020), and Nessen and Vestin (2005) show that average inflation targeting can help alleviate the downward pressure on longer-term inflation expectations caused by the zero lower bound. Our model shows that a policy rule which only offsets employment shortfalls also raises longer-term inflation, suggesting that the reinterpretation of the employment mandate complements and reinforces the likely desired policy outcomes of the FOMC's flexible average inflation targeting framework.…”

Section: Introductionmentioning

confidence: 99%

From Deviations to Shortfalls: The Effects of the FOMC’s New Employment Objective

Bundick¹,

Petrosky-Nadeau²

2021

RWP

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The Federal Open Market Committee (FOMC) recently revised its interpretation of its maximum employment mandate. In this paper, we analyze the possible effects of this policy change using a theoretical model with frictional labor markets and nominal rigidities. A monetary policy which stabilizes "shortfalls" rather than "deviations" of employment from its maximum level leads to higher inflation and more hiring at all times due to expectations of more accommodative future policy. Thus, offsetting only shortfalls of employment results in higher nominal policy rates on average which provide more policy space and better outcomes during a zero lower bound episode. Our model suggests that the FOMC's reinterpretation of its employment mandate could alter the business-cycle and longer-run properties of the economy and result in a steeper reduced-form Phillips curve.

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“…Under boundedly-rational expectations, if cognitive limitations are sufficiently strong, the optimal averaging window is finite, and the welfare gain of adopting AIT can be small. Amano et al (2020) simulate a two-agent New Keynesian (TANK) model in which a fraction of firms have adaptive expectations. They examine the optimal degree of history dependence under AIT and find it to be relatively short for business cycle shocks of standard magnitude and duration.…”

Section: Introductionmentioning

confidence: 99%

Monetary policy strategies in the New Normal: A model-based analysis for the euro area

Busetti

Neri

Notarpietro

et al. 2021

Journal of Macroeconomics

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A New Keynesian model calibrated to the euro area is used to evaluate the stabilization properties of alternative monetary policy strategies when the natural interest rate is low ('new normal') and the probability of reaching the effective lower bound (ELB) is nonnegligible. Price level targeting is the most effective strategy in terms of stabilizing inflation and output and of reducing the duration and frequency of ELB episodes. Temporary price level targeting is also effective in mitigating the ELB constraint, although its stabilization properties are inferior to those of price level targeting. Backward-looking average inflation targeting performs well and is preferable to inflation targeting. The effectiveness of these alternative strategies hinges upon the commitment of a central bank to keeping the policy rate 'lower for longer' and is influenced by the agents' expectation formation mechanism.

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Average Is Good Enough: Average-Inflation Targeting and the ELB

Cited by 18 publications

References 9 publications

Average Inflation Targeting: Time Inconsistency And Intentional Ambiguity

Average Inflation Targeting: Time Inconsistency And Intentional Ambiguity

From Deviations to Shortfalls: The Effects of the FOMC’s New Employment Objective

Monetary policy strategies in the New Normal: A model-based analysis for the euro area

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