On robustness of average inflation targeting

Seppo Honkapohja and Nigel McClung

No 6/2021, Bank of Finland Research Discussion Papers from Bank of Finland

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.

Keywords: Adaptive Learning; Inflation Targeting; Zero Interest Rate Lower Bound (search for similar items in EconPapers)
JEL-codes: E31 E52 E58 (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-dge and nep-mon
References: View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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https://www.econstor.eu/bitstream/10419/240346/1/BoF-DP-2106.pdf (application/pdf)

Related works:
Working Paper: On Robustness of Average Inflation Targeting (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bofrdp:rdp2021_006

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