A Simple Model of Average Inflation Targeting

Laurence Ball and Junnan Zhang

No 33160, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper derives the optimal monetary-policy rule in a simple model with anchored inflation expectations and an effective lower bound (ELB) on interest rates, assuming a long-run inflation goal of 2%. With fully anchored expectations, the optimal policy is a version of average inflation targeting: to offset periods when the ELB forces inflation below 2%, policymakers target a fixed inflation rate above 2% whenever they are unconstrained. With expectations that are partially but not fully anchored, the inflation target away from the ELB varies with the state of the economy. For some parameter values, the target is highest after a period when inflation has been low.

JEL-codes: C61 E52 E58 (search for similar items in EconPapers)
Date: 2024-11
New Economics Papers: this item is included in nep-cba and nep-mon
Note: ME
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