To date, under their strategic frameworks, most central banks have followed variants of what is known as inflation targeting, which entails targeting an inflation rate that is close to a specific number (for example, 2%) over a medium-term horizon. 15  Yet alternative monetary policy strategies exist under which central banks attempt to make up for past deviations of inflation from its target. These are the so-called make-up strategies,12 one of which is known as price-level targeting. In this case, the central bank announces a target growth rate for the price level (for example 2%). Unlike under inflation targeting, should inflation temporarily fall below 2% for any reason, the central bank will have to ensure that it rises above 2% in the future so that the price level returns to its target path. This strategy requires the central bank to correct in the future any past inflation deviation from the value consistent with its price-level target. A strategy that is less radical, albeit similar in spirit, is known as average inflation targeting. In this case, the central bank attempts to keep average inflation at its target level over a given period. Unlike traditional inflation targeting, it includes a component to make up for past deviations from the target set, but only over a specific period of time. This contrasts with price-level targeting, where all past deviations must be made up for, regardless of how long ago they occurred.
However, in the face of deflationary shocks driving inflation below its target and leading the central bank to cut its interest rates, these may ultimately “collide” with their lower bound. This asymmetry makes monetary policy potentially more effective in combating inflation than in combating deflation or, even, persistently low inflation. A dangerous vicious circle may be created as a result. In a setting in which central banks’ hands are expected to be frequently tied by the lower bound on interest rates, economic agents will with good reason expect any inflation overshooting to be corrected swiftly, but no so for undershootings. Therefore, average expected inflation over a long period will tend to run below target. Given that in the long run the nominal interest rate is the real equilibrium interest rate plus expected inflation, a fall in the latter implies lower average nominal rates, causing these to collide with their lower bound more often. This entails less headroom to provide stimulus in recessions with low inflation, further lowering inflation expectations, and so it continues. In this setting of historically low natural rates, a loss of interest rate policy scope and risk of a deanchoring of inflation expectations, the major central banks have deemed it necessary to rethink their monetary policy strategy, i.e. how they express their monetary policy targets and how they pursue them with the tools available.