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Average Inflation Targeting: How far to look into the past and the future?

Author

Listed:
  • Frantisek Masek

    (National Bank of Slovakia)

  • Jan Zemlicka

    (University of Zurich)

Abstract

We analyze the optimal window length in the average inflation targeting rule within a Behavioral THANK model. The central bank faces an occasionally binding effective lower bound (ELB) or persistent supply shocks, and can also use quantitative easing. We show that the optimal averaging period is infinity for a moderate myopia. Finite yet long-lasting windows dominate for stronger cognitive discounting; i.e., the makeup property is shown to be qualitatively resistant to deviation from rational expectations. We point out that the optimal window depends on the speed of return to the target path when myopia plays a bigger role. We quantify the welfare effect of uncertainty due to the ELB (downward inflation bias) and show how it varies across window lengths and cognitive discounting degrees.

Suggested Citation

  • Frantisek Masek & Jan Zemlicka, 2024. "Average Inflation Targeting: How far to look into the past and the future?," Working and Discussion Papers WP 5/2024, Research Department, National Bank of Slovakia.
    • Handle: RePEc:svk:wpaper:1108
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    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • 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
    • E71 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on the Macro Economy

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