Average inflation targeting and the interest rate lower bound

Arbeitspapier

Assigning a discretionary central bank a mandate to stabilize an average in ation rate| rather than a period-by-period in ation rate|increases welfare in a New Keynesian model with an occasionally binding lower bound on nominal interest rates. Under rational expecta- tions, the welfare-maximizing averaging window is infinitely long, which means that optimal average in ation targeting (AIT) is equivalent to price level targeting (PLT). However, AIT with a finite, but sufficiently long, averaging window can attain most of the welfare gain from PLT. Under boundedly-rational expectations, if cognitive limitations are sufficiently strong, the optimal averaging window is finite, and the welfare gain of adopting AIT can be small.

Object Details

• ISBN: 978-92-899-4037-5
• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ECB Working Paper ; No. 2394

Classification and Topics

• Classification: Wirtschaft ; Price Level; Inflation; Deflation ; Monetary Policy ; Central Banks and Their Policies ; Policy Objectives; Policy Designs and Consistency; Policy Coordination ; Macro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on the Macro Economy‡
• Subject: Monetary Policy Objectives ; Makeup Strategies ; Liquidity Trap ; Deationary Bias ; Expectations

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Budianto, Flora ; Nakata, Taisuke ; Schmidt, Sebastian
• Event: Veröffentlichung
• (who): European Central Bank (ECB)
• (where): Frankfurt a. M.
• (when): 2020

Further information

• DOI: doi:10.2866/695844
• Handle: http://hdl.handle.net/10419/229008
• Last update: 10.03.2025, 11:42 AM CET