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Average Inflation Targeting in a Low-Rate Environment

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  • Chengcheng Jia

Abstract

One significant change in the US economy in the last 20 years is the trend decline in real interest rates that pushes the policy rate near the effective lower bound (ELB) and puts downward pressure on inflation. This environment leaves conventional monetary policy tools less effective in accommodating adverse shocks. To better achieve the Federal Reserve’s dual mandate at the ELB, the FOMC adopted a new framework called average inflation targeting (AIT). In this Commentary, I demonstrate that AIT is a better policy in a low-rate environment because of its ability to anchor inflation expectations, and I present possible implications of the flexible implementation of AIT.

Suggested Citation

  • Chengcheng Jia, 2022. "Average Inflation Targeting in a Low-Rate Environment," Economic Commentary, Federal Reserve Bank of Cleveland, vol. 2022(02), pages 1-6, February.
    • Handle: RePEc:fip:fedcec:93762
    DOI: 10.26509/frbc-ec-202202
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    References listed on IDEAS

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    1. Richard H. Clarida, 2019. "The Federal Reserve’s Review of Its Monetary Policy Strategy, Tools, and Communication Practices : a speech at “A Hot Economy: Sustainability and Trade-Offs,” a Fed Listens event sponsored by the Fede," Speech 1085, Board of Governors of the Federal Reserve System (U.S.).
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    Keywords

    inflation; monetary policy;

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