The Fed – How Robust Are Makeup Strategies to Key Alternative Assumptions?

August 2020

How Robust Are Makeup Strategies to Key Alternative Assumptions?

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

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.

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

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Last Update:
August 27, 2020

Source: Federal Reserves

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