How Robust Are Makeup Strategies to Key Alternative Assumptions?

James Hebden, Edward Herbst, Jenny Tang, Giorgio Topa and Fabian Winkler

No 2020-069, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

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 (search for similar items in EconPapers)
JEL-codes: E47 E52 E71 (search for similar items in EconPapers)
Pages: 42
Date: 2020-08-27
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:88725

DOI: 10.17016/FEDS.2020.069

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