Average Inflation Targeting is a More Effective Policy Framework Than Inflation Targeting in the Current US Economy, Cleveland Fed Researcher Finds
The low-rate environment in the United States has pushed the nominal policy rate near the effective lower bound, creating the need for a new monetary policy framework that better achieves the Federal Reserve’s dual mandate of maximum sustainable employment and price stability. In this Economic Commentary, Cleveland Fed researcher Chengcheng Jia shows that a change from inflation targeting to average inflation targeting helps achieve price stability in the current low-rate environment.
“Average inflation targeting can better anchor inflation expectations when conventional policy tools are less effective near the effective lower bound,” says Jia. “In addition, some macroeconomic models suggest that it is desirable to implement average inflation targeting in a flexible way by adjusting both the horizon of average inflation targeting and the weight on inflation deviations relative to the weight on unemployment shortfalls based on shocks to the economy.”
Federal Reserve Bank of Cleveland
The Federal Reserve Bank of Cleveland is one of 12 regional Reserve Banks that along with the Board of Governors in Washington DC comprise the Federal Reserve System. Part of the US central bank, the Cleveland Fed participates in the formulation of our nation’s monetary policy, supervises banking organizations, provides payment and other services to financial institutions and to the US Treasury, and performs many activities that support Federal Reserve operations System-wide. In addition, the Bank supports the well-being of communities across the Fourth Federal Reserve District through a wide array of research, outreach, and educational activities.
The Cleveland Fed, with branches in Cincinnati and Pittsburgh, serves an area that comprises Ohio, western Pennsylvania, eastern Kentucky, and the northern panhandle of West Virginia.
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