Hitting the Elusive Inflation Target

Francesco Bianchi, Leonardo Melosi and Matthias Rottner

No WP-2019-7, Working Paper Series from Federal Reserve Bank of Chicago

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 a low nominal interest rates environment in which the central bank follows a symmetric strategy to stabilize inflation. The deflationary bias increases if macroeconomic uncertainty rises or the natural real interest rate falls. An asymmetric rule according to which the central bank responds less aggressively to above-target inflation corrects the bias and allows inflation to converge to the central bank?s target. We show that adopting this asymmetric rule improves welfare and reduces the risk of self-fulfilling deflationary spirals. This approach does not entail any history dependence in setting the policy rate or any commitment to overshoot inflation after periods in which the lower bound constraint was binding.

Keywords: Deflationary bias; asymmetric rules; opportunistic reflation; welfare; natural rates; zero lower bound; disanchoring of inflation expectations; inflation targeting; liquidity traps; macroeconomic uncertainty (search for similar items in EconPapers)
JEL-codes: D83 E31 E52 E62 E63 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2019-08-30
New Economics Papers: this item is included in nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

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Related works:
Journal Article: Hitting the elusive inflation target (2021)
Working Paper: Hitting the elusive inflation target (2021)
Working Paper: Hitting the Elusive Inflation Target (2019)
Working Paper: Hitting the Elusive Inflation Target (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedhwp:wp-2019-07

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DOI: 10.21033/wp-2019-07

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