The benefits of AIT were concentrated when inflation was below the target and the policy interest rate was at the ELB. But when inflation was above target, AIT tended to lead to increased volatility in employment and output. In our economic models, the dual mandate performed similarly to flexible inflation targeting.5 But it affected employment only very modestly, despite prioritizing it.
As stressed by the experience of the global financial crisis, financial stability is a second requirement to lay the basis for sustained growth. The standard recommendation here is the use of macroprudential policies, with simultaneous and coordinated efforts at the macroeconomic and microprudential levels.