Journal Article

Average Inflation Targeting in a Low-Rate Environment

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.

Keywords: inflation; monetary policy;

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Bibliographic Information

Provider: Federal Reserve Bank of Cleveland

Part of Series: Economic Commentary

Publication Date: 2022-02-23

Volume: 2022

Issue: 02

Pages: 6