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Hitting the Elusive Inflation Target

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  • Francesco Bianchi
  • Leonardo Melosi
  • Matthias Rottner

Abstract

Since the 2001 recession, average core inflation has been below the Federal Reserve’s 2% target. This deflationary bias is a predictable consequence of the current symmetric monetary policy strategy that fails to recognize the risk of encountering the zero-lower-bound. An asymmetric rule according to which the central bank responds less aggressively to above-target inflation corrects the bias, improves welfare, and reduces the risk of deflationary spirals—a pathological situation in which inflation keeps falling indefinitely. This approach does not entail any history dependence or commitment to overshoot the inflation target and can be implemented with an asymmetric target range.

Suggested Citation

  • Francesco Bianchi & Leonardo Melosi & Matthias Rottner, 2019. "Hitting the Elusive Inflation Target," NBER Working Papers 26279, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:26279
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    References listed on IDEAS

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    Cited by:

    1. Jason Choi & Andrew Foerster, . "Optimal Monetary Policy Regime Switches," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics.
    2. Hills, Timothy S. & Nakata, Taisuke & Schmidt, Sebastian, 2019. "Effective lower bound risk," European Economic Review, Elsevier, vol. 120(C).

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    More about this item

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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