Economic Brief

September 2015, No. 15-09

Inflation Targeting: Could Bad Luck Explain Persistent One-Sided Misses?

Andreas Hornstein, Joe Johnson and Karl Rhodes

In January 2012, the Federal Open Market Committee set an explicit inflation target of 2 percent, but the annual inflation rate has been 0.25 percentage points or more below that target for the past 10 quarters. Extended periods of one-sided misses are common among inflation-targeting countries, but it is not clear whether these persistent deviations are caused by structural changes, bad policy or bad luck. Analysis of the statistical properties of the inflation process in the United States suggests that bad luck remains a plausible explanation for the FOMC's current string of one-sided misses.

Additional Resources

Ball, Laurence M., "The Performance of Alternative Monetary Regimes," in Benjamin M. Friedman and Michael Woodford (eds.) Handbook of Monetary Economics Vol. 3, pp. 1303-1343, Amsterdam: North Holland Press, 2010. (A working paper version is available online.)

Ball, Laurence M., and Niamh Sheridan, "Does Inflation Targeting Matter?" in Ben S. Bernanke and Michael Woodford (eds.) The Inflation-Targeting Debate, pp. 249-282, Chicago: University of Chicago, 2004.

Federal Reserve System Board of Governors, "Advance Release of Table 1 of the Summary of Economic Projections," June 16-17, 2015.

Federal Reserve System Board of Governors, "Minutes of the Federal Open Market Committee," January 24-25, 2012.

Levin, Andrew T., Fabio M. Natalucci, and Jeremy M. Piger, "The Macroeconomic Effects of Inflation Targeting," Federal Reserve Bank of St. Louis Review, July/August 2004, vol. 86, no. 4, pp. 51–80.

Roger, Scott, "Inflation Targeting at 20: Achievements and Challenges," International Monetary Fund Working Paper No. 09/236, October 2009.

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