Average-Inflation Targeting and the Effective Lower Bound

Diwan, Renuka; Leduc, Sylvain; Mertens, Thomas M.

Journal Article

Average-Inflation Targeting and the Effective Lower Bound

Abstract: In response to the COVID-19 pandemic, the Federal Reserve cut the federal funds rate to essentially zero. It took further measures to support the functioning of financial markets and the flow of credit. Nevertheless, the economic downturn is putting downward pressure on inflation, which had already been running below the Fed’s 2% target for several years. This raises additional concerns that inflation expectations could decline and push inflation down further, ultimately hampering economic activity. A monetary policy framework based on average-inflation targeting could help address these challenges.

Keywords: Recessions; inflation; covid-19;