The reaction of inflation expectations to the temporary price level target should help monetary policy to achieve its objective. This proposal deserves a thorough analysis, even if one can see challenges in communication8. It is of particular interest especially if we do not want to rely on large-scale bond purchases as the first solution to the “zero lower bound” problem in the future.
In fact, Bernanke’s solution can be seen as a further developed form of forward guidance. Even in communication, action can sometimes speak louder than words. Clearly, monetary policy space is reduced if the central bank, as seen from the outside, does not appear to resist downward deviations from its inflation objective, and this appearance gets incorporated to private expectations.