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Average is Good Enough: Average-inflation Targeting and the ELB

Robert Amano, Stefano Gnocchi (), Sylvain Leduc and Joel Wagner ()

Staff Working Papers from Bank of Canada

Abstract: The Great Recession and current pandemic have focused attention on the constraint on nominal interest rates from the effective lower bound. This has renewed interest in monetary policies that embed makeup strategies, such as price-level or average-inflation targeting. This paper examines the properties of average-inflation targeting in a two-agent New Keynesian (TANK) model in which a fraction of firms have adaptive expectations. We examine the optimal degree of history dependence under average-inflation targeting and find it to be relatively short for business cycle shocks of standard magnitude and duration. In this case, we show that the properties of the economy are quantitatively similar to those under a price-level target.

Keywords: Business fluctuations and cycles; Economic models; Monetary policy framework (search for similar items in EconPapers)
JEL-codes: E52 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2020-07
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:20-31

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