蘑菇短视频

James Dean

A recent study by a faculty member in the College of Business at Western Carolina University suggests that changes in how the Federal Reserve deals with inflation strategies could improve stability in monetary policy and financial markets.

In the study, James Dean, 蘑菇短视频assistant professor of economics in the School of Economics, Management and Project Management, found that a popular strategy used by central banks to offset the impact of cycles of low inflation should be accompanied by clarity to the public regarding how long that strategy will be in effect.

That specific strategy 鈥� average inflation targeting 鈥� is an approach in which central banks account for periods of low inflation by allowing prices to run slightly higher afterward, which keeps the long-term average at a more steady and predictable level.

鈥淭his study finds that while five-year averaging works best for stabilizing the economy, the policy fails if the public is not clear about the timeframe being used,鈥� Dean said. 鈥淔or average inflation targeting 鈥� or AIT 鈥� to be effective, central banks must be transparent about their specific policy strategy to prevent uncertainty from undermining their goals.鈥�

In the study, Dean used an economic model to simulate how people, businesses and banks respond to the central bank's inflation policy. This tests how economic behavior changes when the policy is clearly communicated versus when people must piece together the central bank's intentions by watching how it moves interest rates, he said.

Results of his study are published in a paper titled 鈥淏etter on Average? Average Inflation Targeting with an Unclear Averaging Window鈥� in the January 2026 Southern Economic Journal.

From his perspective as author of the paper, Dean said he sees two significant findings from the study.

鈥淔irst, average inflation targeting, where the Fed tries to make up for periods when inflation was unusually high or unusually low, can keep the economy steadier than the central banking system鈥檚 usual approach. This is best done when the Fed focuses on a period of about five years,鈥� he said.

鈥淪econd 鈥� and relatedly 鈥� that benefit depends on how clearly the Fed explains its approach,鈥� Dean said. 鈥淚f the Fed isn鈥檛 clear and transparent about its framework, people and businesses have a harder time planning for the future, which can actually make the economy more unstable.鈥�

Dean鈥檚 paper is designed to serve as a benchmark to evaluate the trade-offs between policy clarity versus vagueness in average inflation targeting frameworks. While the Federal Reserve has shown a more irregular response to inflation deviations, the paper is an effort to isolate the effects of commitment and transparency on expectations and welfare, he said.

鈥淭he effectiveness of average inflation targeting depends on its influence on expectations. For example, if it can raise expectations enough to compensate for slower policy responses, it will be more effective than standard inflation targeting,鈥� Dean said.

鈥淗owever, imperfect information about the averaging window makes it more difficult for agents to form consistent expectations of future policy, leading to greater instability. In turn, the gains from average inflation targeting disappear under imperfect information relative to a full-information policy,鈥� he said.

Dean said that he believe the results, taken as a whole, could be informative for the Fed's future policy framework reviews.

鈥淢onetary policy faces new obstacles in a post-pandemic world, and, as results here would indicate, commitment and clarity about the future of average inflation targeting will be key to the policy's success,鈥� he said.

The Fed's flexible average inflation targeting framework was unveiled during the midst of the global COVID-19 pandemic, so it is difficult to separate the effects of the new strategy from the impacts of the pandemic.

鈥淪hortly after the framework began, many states started to relax pandemic-related restrictions, the United States government passed a large fiscal stimulus and inflation rose to its highest level in four decades,鈥� Dean said.

In his study, Dean used a dynamic stochastic general equilibrium (or DSGE) model to isolate average inflation targeting and the uncertainty surrounding it. The model incorporates imperfect information about the central bank's policy framework, and it uses a fixed and symmetric averaging window to serve as a benchmark and to isolate the effects of imperfect information.

DSGE models are comprehensive macroeconomic frameworks used by central banks and academics to simulate, forecast and analyze economic policy.

Targeting average inflation plays an important role in the formation of consumer expectations, and the effectiveness of the policy depends on its ability to change those expectations, Dean said.

The study findings provide insights into the design of monetary policy frameworks, particularly as central banks revisit their strategies.

鈥淯nder imperfect information, households and firms have a harder time forming expectations, leading to less stability,鈥� Dean said. 鈥淚n short, AIT can be beneficial, and credibility and transparency of the averaging window improve the effectiveness of the policy.鈥�