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Implications for Determinacy with Average Inflation Targeting

Author

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  • Ahmad, Yamin
  • Murray, James

Abstract

We use a standard New Keynesian model to explore implications of backward- and forward-looking windows for monetary policy with average inflation targeting and investigate the conditions for determinacy. A unique equilibrium rules out sunspot shocks that can lead to self-fulfilling shocks for inflation expectations. We find limitations for the length of the forward window and demonstrate how this depends on other parameters in the model, including parameters governing monetary policy and expectations formation.

Suggested Citation

  • Ahmad, Yamin & Murray, James, 2022. "Implications for Determinacy with Average Inflation Targeting," MPRA Paper 113119, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:113119
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    File URL: https://mpra.ub.uni-muenchen.de/113119/1/MPRA_paper_113119.pdf
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    References listed on IDEAS

    as
    1. Thomas A. Lubik & Frank Schorfheide, 2004. "Testing for Indeterminacy: An Application to U.S. Monetary Policy," American Economic Review, American Economic Association, vol. 94(1), pages 190-217, March.
    2. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
    3. Budianto, Flora & Nakata, Taisuke & Schmidt, Sebastian, 2023. "Average inflation targeting and the interest rate lower bound," European Economic Review, Elsevier, vol. 152(C).
    4. Olivier Coibion & Yuriy Gorodnichenko & Edward S. Knotek & Raphael Schoenle, 2023. "Average Inflation Targeting and Household Expectations," Journal of Political Economy Macroeconomics, University of Chicago Press, vol. 1(2), pages 403-446.
    5. Hoffmann, Mathias & Moench, Emanuel & Pavlova, Lora & Schultefrankenfeld, Guido, 2022. "Would households understand average inflation targeting?," Journal of Monetary Economics, Elsevier, vol. 129(S), pages 52-66.
    6. Eo, Yunjong & Lie, Denny, 2020. "Average inflation targeting and interest-rate smoothing," Economics Letters, Elsevier, vol. 189(C).
    7. repec:zbw:bofrdp:2021_006 is not listed on IDEAS
    8. Sims, Christopher A, 2002. "Solving Linear Rational Expectations Models," Computational Economics, Springer;Society for Computational Economics, vol. 20(1-2), pages 1-20, October.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Average Inflation Targeting; Determinacy; Monetary Policy;
    All these keywords.

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • 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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