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A Simple Model of Average Inflation Targeting

Author

Listed:
  • Laurence M. Ball
  • Junnan Zhang

Abstract

This paper derives the optimal monetary-policy rule in a simple model with anchored inflation expectations and an effective lower bound (ELB) on interest rates, assuming a long-run inflation goal of 2%. With fully anchored expectations, the optimal policy is a version of average inflation targeting: to offset periods when the ELB forces inflation below 2%, policymakers target a fixed inflation rate above 2% whenever they are unconstrained. With expectations that are partially but not fully anchored, the inflation target away from the ELB varies with the state of the economy. For some parameter values, the target is highest after a period when inflation has been low.

Suggested Citation

  • Laurence M. Ball & Junnan Zhang, 2024. "A Simple Model of Average Inflation Targeting," NBER Working Papers 33160, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:33160
    Note: ME
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    More about this item

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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