August 2020

Alternative Strategies: How Do They Work? How Might They Help?

Jonas Arias, Martin Bodenstein, Hess Chung, Thorsten Drautzburg, and Andrea Raffo

Abstract:

Several structural developments in the U.S. economy—including lower neutral interest rates and a flatter Phillips curve—have challenged the ability of the current monetary policy framework to deliver on the Federal Open Market Committee’s (FOMC) dual-mandate goals. This paper explores whether makeup strategies, in which policymakers seek to stabilize average inflation around the inflation target over some horizon, could strengthen the FOMC’s ability to fulfill its dual mandate. The quantitative analysis discussed here suggests that credible makeup strategies may provide some moderate stabilization gains. The practical implementation of these strategies, however, faces a number of challenges that would have to be surmounted for the full benefit of these strategies to be realized.

Keywords: Inflation stabilization, effective lower bound, Taylor rule, alternative monetary policy strategies, monetary policy communication.

DOI: https://doi.org/10.17016/FEDS.2020.068

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Last Update:
August 27, 2020