Revisiting monetary policy objectives and strategies: international experience and challenges from the ELB

We review the experience of central banks in 12 advanced economies in formulating their price stability objectives during the last 20 years. All central banks under review target a small and positive inflation rate (typically 2%). In most cases, they set a point target, in some a range or a point with bands around it. Range and bands are more common among small open economies. We also conduct a model-based analysis of the macroeconomic performance of different monetary policy strategies when the policy rate is constrained by the effective lower bound (ELB). Under standard inflation targeting, inflation remains, on average, below target (disinflationary bias). ELB incidence and duration are higher the lower the target. A point inflation target performs better than a range, especially if compared to an asymmetric one with the focal point close to the ceiling. Makeup strategies (price level targeting and average inflation targeting) and asymmetric inflation targeting strategies, in which the central bank’s reaction to below-target inflation is stronger compared with the case of above-target inflation, reduce the disinflationary effects of the ELB and have better macroeconomic stabilization properties compared with standard inflation targeting.