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Alternative Strategies: How Do They Work? How Might They Help?

Author

Listed:
  • Jonas E. Arias
  • Martin Bodenstein
  • Hess Chung
  • Thorsten Drautzburg
  • Andrea Raffo

Abstract

Several structural developments in the U.S. economy—including lower neutral interest rates and a flatter Phillips curve—have challenged the ability of the current monetary policy framework to deliver on the Federal Open Market Committee’s (FOMC) dual-mandate goals. This paper explores whether makeup strategies, in which policymakers seek to stabilize average inflation around the inflation target over some horizon, could strengthen the FOMC’s ability to fulfill its dual mandate. The quantitative analysis discussed here suggests that credible makeup strategies may provide some moderate stabilization gains. The practical implementation of these strategies, however, faces a number of challenges that would have to be surmounted for the full benefit of these strategies to be realized.

Suggested Citation

  • Jonas E. Arias & Martin Bodenstein & Hess Chung & Thorsten Drautzburg & Andrea Raffo, 2020. "Alternative Strategies: How Do They Work? How Might They Help?," Finance and Economics Discussion Series 2020-068, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:2020-68
    DOI: 10.17016/FEDS.2020.068
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    File URL: https://www.federalreserve.gov/econres/feds/files/2020068pap.pdf
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    More about this item

    Keywords

    Inflation stabilization; Effective lower bound; Taylor rule; Alternative monetary policy strategies; Monetary policy communication;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • 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

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