On robustness of average inflation targeting

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Title: On robustness of average inflation targeting
Author: Honkapohja, Seppo ; McClung, Nigel
Organization: Bank of Finland
Series: Bank of Finland Research Discussion Papers
Series number: 6/2021
Year of publication: 2021
Publication date: 21.4.2021
Pages: 68
Subject (yso): inflaatio; tavoitteet; mallit (havainnointimallit); oppiminen; korko; rahapolitiikka
Keywords: inflaatiotavoitteet; ZLB
JEL: E31; E52; E58
Other keywords: adaptive learning; inflation targeting; zero interest rate lower bound.
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.
Rights: https://helda.helsinki.fi/bof/copyright

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