Report
Patrick Artus

Can average inflation targeting be effective?

The Federal Reserve and probably the ECB are switching to average inflation targeting: the inflation target has to be achieved on average over the medium term, so if inflation has been lower than the target for a period, it must subsequently be higher than the target. If this change in monetary strategy does not change the inflation dynamics, it will simply lead to monetary policy remaining expansionary for far longer. But the idea behind average inflation targeting (which is equivalent to price level targeting) is that it makes monetary policy more effective in restoring inflation. Since inflation must become higher than the inflation target, inflation expectations rise more sharply, which helps lift inflation after a recession. The question is whether this mechanism is present: have the announcements of a switch to average inflation targeting driven up expected inflation in the United States and the euro zone? The answer seems to be no.
Provider
Natixis
Natixis

Based across the world’s leading financial centers, Natixis CIB Research offers an integrated view of the markets. The team provides support to inform Natixis clients’ investment and hedging decisions across all asset classes.

 

Analysts
Patrick Artus

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