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On robustness of average inflation targeting

Author

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  • Honkapohja, Seppo
  • McClung, Nigel

Abstract

This paper considers the performance of average inflation targeting (AIT) policy in a New Keynesian model with adaptive learning agents. Our analysis raises concerns regarding robustness of AIT when agents have imperfect knowledge. In particular, the target steady state can be locally unstable under learning if details about the policy are not publicly available. Near the low steady state with interest rates at the zero lower bound, AIT does not necessarily outperform a standard inflation targeting policy. Policymakers can improve outcomes under AIT by (i) targeting a discounted average of inflation, or (ii) communicating the data window for the target.

Suggested Citation

  • Honkapohja, Seppo & McClung, Nigel, 2021. "On robustness of average inflation targeting," Bank of Finland Research Discussion Papers 6/2021, Bank of Finland.
    • Handle: RePEc:zbw:bofrdp:rdp2021_006
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    File URL: https://www.econstor.eu/bitstream/10419/240346/1/BoF-DP-2106.pdf
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    Cited by:

    1. Jia, Chengcheng & Wu, Jing Cynthia, 2023. "Average inflation targeting: Time inconsistency and ambiguous communication," Journal of Monetary Economics, Elsevier, vol. 138(C), pages 69-86.
    2. Salle, Isabelle L., 2023. "What to target? Insights from a lab experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 212(C), pages 514-533.
    3. Elfsbacka Schmöller, Michaela & Spitzer, Martin, 2022. "Lower for longer under endogenous technology growth," Bank of Finland Research Discussion Papers 6/2022, Bank of Finland.
    4. Ascari, Guido & Mavroeidis, Sophocles & McClung, Nigel, 2023. "Coherence without rationality at the zero lower bound," Journal of Economic Theory, Elsevier, vol. 214(C).
    5. Piergallini, Alessandro, 2022. "Average inflation targeting and macroeconomic stability," Economics Letters, Elsevier, vol. 219(C).
    6. 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.
    7. 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.

    More about this item

    Keywords

    Adaptive Learning; Inflation Targeting; Zero Interest Rate Lower Bound;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • 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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