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Title: Hitting the Elusive Inflation Target

Author(s): Francesco Bianchi, Leonardo Melosi and Matthias Rottner

Publication Date: November 2019

Keyword(s):

Programme Area(s): Monetary Economics and Fluctuations

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 the current symmetric monetary policy strategy that fails to recognize the risk of encountering the zero-lower-bound. An asymmetric rule according to which the central bank responds less aggressively to above-target inflation corrects the bias, improves welfare, and reduces the risk of deflationary spirals -- a pathological situation in which inflation keeps falling indefinitely. This approach does not entail any history dependence or commitment to overshoot the inflation target and can be implemented with an asymmetric target range.

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Bibliographic Reference

Bianchi, F, Melosi, L and Rottner, M. 2019. 'Hitting the Elusive Inflation Target'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=14161