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Flexible Average Inflation Targeting: How Much Is U.S. MonetaryPolicy Changing?

Author

Listed:
  • Jarod Coulter

    (Federal Reserve Bank of Dallas)

  • Roberto Duncan

    (Ohio University)

  • Enrique Martínez-García

    (Federal Reserve Bank of Dallas)

Abstract

One major outcome of the Federal Reserve’s 2019–20 framework review was the adoption of a Flexible Average Inflation Targeting (FAIT) strategy in August2020. Using synthetic control methods, we document that U.S. inflation rose post-FAIT considerably more than predicted had the strategy not changed (an average of1.18percentage points during2020:M8–2022:M2). To explore the ex-tent to which targeting average inflation delayed the Fed’s response and contributed to post-FAIT inflation, we adopt a version of the open-economy New Keynesian model in Martínez-García (2021)and document the economic consequences of adopting alternative measures of average inflation as policy objectives. We document three additional major findings using this general equilibrium setup: First, depending on how far back and how much weight is assigned to past inflation misses, the policy outcomes under FAIT are similar to those under the pre-FAIT regime. Secondly, we find that the implementation of FAIT can have large effects over short periods of time as it tends to delay action. However, over longer periods of time—such as the1984:Q1–2019:Q4 pre-FAIT period—its effects wash out and appear negligible. Finally, we find that different average inflation measures explain an average of0.5percentage points per quarter of the post-FAIT (2020:Q4–2021:Q4) inflation surge, indicating that targeting average inflation by itself can only explain part of the inflation spike since August2020.

Suggested Citation

  • Jarod Coulter & Roberto Duncan & Enrique Martínez-García, 2022. "Flexible Average Inflation Targeting: How Much Is U.S. MonetaryPolicy Changing?," Revista Economía, Fondo Editorial - Pontificia Universidad Católica del Perú, vol. 45(89), pages 102-149.
    • Handle: RePEc:pcp:pucrev:y:2022:i:89:p:102-149
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    More about this item

    Keywords

    Open-economy New Keynesian model; Monetary policy; Flexible average inflation targeting; Flexible inflation targeting; Survey;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications

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