Average Inflation Targeting
Updated: Feb 28, 2021
Alessandra Vollmer - February 24, 2021
After years of unsuccessful inflation target policy, the Fed announced a drastic change to its policy on the 27th August 2020: The average inflation target- ing. In contrast to inflation targeting, this policy measure allows inflation to run higher than the 2% target, having further effects on future expectations and unemployment levels. In the New Keynesian model this mandate would increase welfare, given that agents form their expectations based on rationale. Generally, the U.S. Federal Reserve’s (Fed) primary objectives are to maintain price stability, which is defined as inflation at 2% and maximum sustainable employment. With this new strategy called “flexible form of average inflation targeting” (AIT), it can theoretically be ensured that the Fed’s inflation objective of 2% is obtained on average.