DP19299 Monetary policy frameworks away from the ELB
We evaluate the performance of alternative monetary policy rules during and after the post-pandemic inflation surge. We first document that inflation expectations remained well anchored in advanced economies irrespective of differences in monetary policy frameworks. We then show that an aggressive inflation targeting (IT) rule would have contained the inflation surge very modestly relative to a benchmark average inflation targeting (AIT) rule, at the cost of larger negative output gaps. Finally, looking at the post inflation surge period, we compare monetary policy frameworks with respect to potential changes in the distribution of the shocks hitting the economy, the slope of the Phillips curve, and the level of r*. We illustrate that the benefits of a dual mandate relative to a single mandate increase under a AIT rule and when the Phillips curve is flatter; that AIT rules tend to stabilize inflation and interest rates relative to IT rules but can generate higher output volatility; and that AIT is more robust than IT to a possible misperception of r*.
