Average inflation targeting has implementation problems
Stephen Williamson argues, in this commentary, that if the FOMC was truly committing to an inflation averaging procedure, it would have to specify two things:
- The period over which the FOMC was averaging past inflation rates to determine how much needs to be made up for past misses;
- The length of the future period over which the FOMC intends to make up the missing inflation.
To see how actual inflation targeting would work, suppose the FOMC specifies a rolling window relative to the current month, over which it is going to average. For example, if the FOMC chooses a window that goes 2 years into the past, and 2 years into the future, then at each point in time, it would calculate average inflation over the past two years, and then plan to make it up over the next two years, in such a way that average inflation from two years ago to two years hence is anticipated to be 2%. This implies that the target inflation rate will change month-to-month. That’s pretty complicated, and hard to explain – which is an argument against inflation averaging – but if you’re going to do it, you might as well do it properly.
Sorry You’re Let Down By the Fed’s Monetary Policy Review
By: Stephen Williamson – University of Western Ontario
What will the effect on NGDP be
On the other hand, inflation volatility is not necessarily bad if it is associated with more stable NGDP growth. After all, the Fed’s dual mandate implies that inflation should be above 2% during recessions and below 2% during booms, which is also an implication of NGDP targeting. […] As long as NGDP does not become more unstable, then raising the average inflation rate from 1.5% to 2% would count as a win for the Fed. After all, 2% is their target.
How will we know if average inflation targeting is working?
By: Scott Sumner – George Mason University
What if the Phillips curve is not dead?
The statement of “Longer Run Goals and Monetary Policy Strategy” indicates that the committee’s policy decision will be informed by its”assessments of the shortfalls of employment from its maximum level.” This sentence is quite problematic according to Willem Buiter:
This new asymmetric interpretation is extremely worrying. It suggests either that maximum employment is achieved only when every working-age person has a full-time job plus any desired overtime, or that the Phillips curve – which posits an inverse relationship between inflation and unemployment – is dead when it is, at most, stunned. Now, it seems, the Fed will not tighten monetary policy even when the actual level of employment exceeds that at which inflationary pressures in the labor market manifest themselves – which is bound to be well below the FOMC’s maximum employment level.
The Fed’s Dangerous New Strategy
By: Willem H. Buiter – Columbia University
