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Monetary Policy in a Low-Inflation Environment: Developing a State-Contingent Price-Level Target

Authors

  • CHARLES L. EVANS

    1. Charles L. Evans is President and Chief Executive Officer of the Federal Reserve Bank of Chicago (E-mail: information.chi@chi.frb.org).
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Abstract

A number of academic studies find that either price-level targeting or temporary above-average inflation are nearly optimal policies to address a liquidity trap crisis. Still, central bankers and the public generally question whether even a temporarily higher inflation rate could be beneficial in addressing a liquidity trap or could be consistent with price stability over the longer term. At the same time, however, the Federal Reserve's projections for high unemployment and low inflation do not seem to be consistent with the best monetary policies to address the Fed's dual mandate responsibilities. Accordingly, it is useful to seriously discuss these potentially beneficial alternative policies.

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