On Robustness of Average Inflation Targeting

Seppo Honkapohja and Nigel McClung

No 16001, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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: 2021-04
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Working Paper: On robustness of average inflation targeting (2021)
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