How Robust Are Makeup Strategies to Key Alternative Assumptions?

RePEc Short ID: pwi389
ORCID iD: 0000-0002-1241-7941

Hebden, James; Herbst, Edward P.; Tang, Jenny; Topa, Giorgio; Winkler, Fabian

doi:10.17016/FEDS.2020.069

Working Paper

How Robust Are Makeup Strategies to Key Alternative Assumptions?

Abstract: We analyze the robustness of makeup strategies—policies that aim to offset, at least in part, past misses of inflation from its objective—to alternative modeling assumptions, with an emphasis on the role of inflation expectations. We survey empirical evidence on the behavior of shorter-run and long-run inflation expectations. Using simulations from the FRB/US macroeconomic model, we find that makeup strategies can moderately offset the real effects of adverse economic shocks, even when much of the public is uninformed about the monetary strategy. We also discuss the robustness of makeup strategies to alternative assumptions about the slope of the Phillips curve and the (mis)perception of economic slack.

Keywords: Monetary policy; Effective lower bound; Expectations;

JEL Classification: E47; E52; E71;

https://doi.org/10.17016/FEDS.2020.069