For background, policies of “inflation targeting” have dominated in developed country central banks for the last three or four decades, implicitly or explicitly. Under this policy, central banks explicitly aim for some target rate of inflation (or target range) each year,
For example: the ECB, as of 2021, has a symmetric, medium-term 2% inflation target; the Fed has since the 1990s been thought to operate under an implicit inflation target of 2%, which it formalized in a 2012 statement.
More recently, the Fed has adopted a policy which has become known as "flexible average inflation targeting", where it has stated or implied a willingness to allow inflation to go somewhat above 2% if inflation had been below 2% in the recent past; and vice versa for recent inflation overshoots. Economic theory predicts that this sort of “make-up policy”, compared to the prior policy of implicitly “letting bygones be bygones”, is very beneficial for avoiding recessions – particularly at the ZLB – by anchoring expectations for the future price level.
Some economists argue that the Fed should make a more significant change to its policy framework, and focus on nominal GDP growth rather than inflation. Nominal GDP growth is equal to (by definition) the sum of inflation and real GDP growth: For example, the Fed might target 4% NGDP growth each year, expecting on average 2% growth in real GDP and therefore 2% inflation on average.
Under NGDP targeting, the central bank would allow inflation to rise when real growth is low (and vice versa). Many economists argue that such a policy would better prevent economic fluctuations (particularly at the ZLB) but also more generally. For more on NGDP targeting, see: , , , .
A similar, but slightly different alternative policy regime would target stable growth in nominal wages. Under nominal wage targeting, the central bank would aim for stable growth in an index of nominal wages in the economy. For example, the Fed might target 3.5% annual growth in an appropriate index of nominal wages, reflecting expectations for on average 1.5% growth in labor productivity and 2% inflation. For more on nominal wage targeting, see: , , .