Two Sorts of Average Inflation Targeting

George SelginIt occurs to me that recent discussions of the Fed ' s new average inflation targeting plan gloss over a subtle distinction between two different kinds of Average Inflation Targeting (AIT). Hence this post explaining the difference, and why I think it matters.The difference between the two sorts of AIT that I have in mind is subtle, so pay close attention! It hinges not on any different central bank objectives or reaction function parameters or that sort of thing, but on two different reasons why a central bank might find that it has veered from its inflation target in the first place. A central bank may fail to hit its target because the authorities fail to correctly anticipate upcoming changes in various price level determinants. Call such misses " unexpected target deviations. " Or it may fail because, although its forecasts are correct, circumstances prevent it from adjusting its stance as needed, given its forecast, to keep the price level on target. Call these " expected target deviations. " The " zero lower bound " (ZLB) problem is the most conspicuous example of a circumstance that could lead to expected target deviations. Allowing that unconventional policies are either impractical or inadequate, a central bank stuck at the ZLB may know perfectly well that it ' s about to undershoot its inflation target, without being able to avoid doing so.It turns out that the implications of AIT, understood as a means for eventually making up for previous, unwanted pr...
Source: Cato-at-liberty - Category: American Health Authors: Source Type: blogs