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

Frantisek Masek and Jan Zemlicka ()
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Jan Zemlicka: University of Zurich

No WP 5/2024, Working and Discussion Papers from Research Department, National Bank of Slovakia

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.

JEL-codes: E31 E32 E52 E58 E71 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2024-08
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
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Working Paper: Average inflation targeting: how far to look into the past and the future? (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:svk:wpaper:1108

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