Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/245529 
Year of Publication: 
2021
Series/Report no.: 
Deutsche Bundesbank Discussion Paper No. 40/2021
Publisher: 
Deutsche Bundesbank, Frankfurt a. M.
Abstract: 
Since the 2001 recession, average core inflation has been below the Federal Reserve's 2% target. This deflationary bias is a predictable consequence of a symmetric monetary policy strategy that fails to recognize the risk of encountering the zero-lower-bound. An asymmetric rule according to which the central bank responds less aggressively to above-target inflation corrects the bias, improves welfare, and reduces the risk of deflationary spirals - a pathological situation in which inflation keeps falling indefinitely. This approach does not entail any history dependence or commitment to overshoot the inflation target and can be implemented with an asymmetric target range. A counterfactual simulation shows that a modest level of asymmetry would have removed the deflationary bias observed in the United States.
Subjects: 
Asymmetric monetary policy
deflationary bias
deflationary spiral
target range
framework review
JEL: 
E31
E52
ISBN: 
978-3-95729-848-5
Document Type: 
Working Paper

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