Modelling the change in US monetary policy framework in NiGEM

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Pub. Date
08 February, 2021
Topical Feature 2

Key points

  • The Federal Reserve (Fed) has moved to an average inflation targeting regime. The implications of this change depend critically on how agents form expectations.
  • In the near term, the change in policy framework may have little to no impact on economic prospects unless inflation expectations rise in line with the implicit temporary increase in the inflation target.
  • Over the longer term, if the Fed is able to guide inflation expectations, the new policy framework can be expected to deliver economic stability, while requiring less monetary policy space. However, if agents form adaptive expectations, the new policy framework may, in fact, amplify economic cycles.