Average Inflation Targeting in a Low-Rate Environment

One significant change in the US economy last 20 years is trend decline real interest rates that pushes policy rate near effective lower bound (ELB) and puts downward pressure on inflation. This environment leaves conventional monetary tools less accommodating adverse shocks. To better achieve Federal Reserve’s dual mandate at ELB, FOMC adopted a new framework called average inflation targeting (AIT). In this Commentary, I demonstrate AIT low-rate because of its ability to anchor expectations, present possible implications flexible implementation AIT.