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The lower and upper bounds of the Federal Open Market Committee's long-run inflation objective

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  • Daniel L. Thornton

Abstract

It is widely acknowledged that the Fed can control the average inflation rate over a period of time reasonably well. Because of this and the Federal Open Market Committee's (FOMC's) long-standing commitment to price stability, the author argues that the FOMC has an implicit long-run inflation objective (LIO)-lower and upper bounds to the long-run inflation rate. He shows that the statements made by the FOMC in 2003 clarified the lower bound of its LIO and that the average of long-run inflation expectations responded by rising about 80 basis points. Moreover, consistent with reducing the market's uncertainty about the FOMC's LIO, long-run inflation expectations became more stable. The FOMC has recently been more specific about the upper bound of its LIO as well. The FOMC could eliminate the remaining uncertainty by establishing an explicit, numerical inflation objective.

Suggested Citation

  • Daniel L. Thornton, 2007. "The lower and upper bounds of the Federal Open Market Committee's long-run inflation objective," Review, Federal Reserve Bank of St. Louis, issue May, pages 183-194.
  • Handle: RePEc:fip:fedlrv:y:2007:i:may:p:183-194:n:v.89no.3
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    References listed on IDEAS

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    1. Nelson Edward, 2005. "The Great Inflation of the Seventies: What Really Happened?," The B.E. Journal of Macroeconomics, De Gruyter, vol. 5(1), pages 1-50, July.
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    4. Alan Greenspan, 2005. "Chairman's remarks," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 137-138.
    5. Brian P. Sack & Robert Elsasser, 2004. "Treasury inflation-indexed debt: a review of the U.S. experience," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 47-63.
    6. William Poole, 2006. "Inflation targeting," Review, Federal Reserve Bank of St. Louis, issue May, pages 155-164.
    7. Nelson, Edward & Nikolov, Kalin, 2004. "Monetary Policy and Stagflation in the UK," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(3), pages 293-318, June.
    8. Robert H. Rasche & Daniel L. Thornton, 2006. "Greenspan's unconventional view of the long-run inflation/output trade-off," Monetary Trends, Federal Reserve Bank of St. Louis, issue Jan.
    9. Brian P. Sack, 2000. "Deriving inflation expectations from nominal and inflation-indexed Treasury yields," Finance and Economics Discussion Series 2000-33, Board of Governors of the Federal Reserve System (U.S.).
    10. Ben S. Bernanke, 1993. "Credit in the macroeconomy," Quarterly Review, Federal Reserve Bank of New York, issue Spr, pages 50-70.
    11. Simon H. Kwan, 2005. "Inflation expectations: how the market speaks," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue oct7.
    12. Ben S. Bernanke & Otmar Issing & Donald L. Kohn, 2004. "Panel discussion: inflation targeting," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 165-183.
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    Cited by:

    1. Bullard, James B., 2013. "Seven Faces of "The Peril"," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 613-628.
    2. Daniel L. Thornton, 2010. "Which comes first: inflation or the FOMC's funds rate target?," Economic Synopses, Federal Reserve Bank of St. Louis.
    3. Daniel L. Thornton, 2008. "The unusual behavior of the federal funds and 10-year Treasury rates: a conundrum or Goodhart’s Law?," Working Papers 2007-039, Federal Reserve Bank of St. Louis.
    4. David Laidler, 2007. "Better Late Than Never: Towards a Systematic Review of Canada's Monetary Policy Regime," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 252, July.

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