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Average Inflation Targeting

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Author Info

  • Nessén, Marianne

    ()
    (Research Department, Central Bank of Sweden)

  • Vestin, David

    ()
    (Institute for International Economic Studies)

Abstract

The analysis of this paper demonstrates that when the Phillips curve has forward-looking components, a goal for average inflation - i.e. targeting a j-period average of one-period inflation rates - will cause inflation expectations to change in a way that improves the short-run trade-off faced by the monetary policymaker. Average inflation targeting is thus an example of a 'modified' loss function, which when implemented ina discretionary fashion results in more efficient outcomes from the standpoint of the true social objective (inflation targeting under commitment), than the discretionary pursuit of the true objective itself. In purely forward-looking models, average inflation targeting is dominated by price level targeting. But we also demonstrate that in models where the Phillips curve has both forward- and backward-looking components, there are cases when the average inflation target provides more efficient outcomes than both 'ordinary' one-period inflation targeting and price level targeting.

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Bibliographic Info

Paper provided by Sveriges Riksbank (Central Bank of Sweden) in its series Working Paper Series with number 119.

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Length: 45 pages
Date of creation: 01 Dec 2000
Date of revision:
Publication status: Published in Journal of Money, Credit and Banking, 2005, pages 837-864.
Handle: RePEc:hhs:rbnkwp:0119

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Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
Phone: 08 - 787 00 00
Fax: 08-21 05 31
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Web page: http://www.riksbank.com/
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Keywords: Optimal monetary policy; Inflation targeting; Optimal delegation;

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References

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  1. Mervyn King, 1999. "Challenges for monetary policy : new and old," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 11-57.
  2. Steinsson, Jon, 2003. "Optimal monetary policy in an economy with inflation persistence," Journal of Monetary Economics, Elsevier, vol. 50(7), pages 1425-1456, October.
  3. Bennett T. McCallum & Edward Nelson, 2000. "Timeless Perspectives vs. Discretionary Monetary Policy In Forward-Looking Models," NBER Working Papers 7915, National Bureau of Economic Research, Inc.
  4. Svensson, L-E-O, 1996. "Price Level Targeting vs Inflation Targeting : A free Lunch?," Papers 614, Stockholm - International Economic Studies.
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  7. Julio Rotemberg & Michael Woodford, 1997. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 297-361 National Bureau of Economic Research, Inc.
  8. Jensen, Henrik, 1999. "Targeting Nominal Income Growth or Inflation?," CEPR Discussion Papers 2341, C.E.P.R. Discussion Papers.
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  12. Woodford, Michael, 2000. "Optimal Monetary Policy Inertia," Seminar Papers 666, Stockholm University, Institute for International Economic Studies.
  13. Glenn Rudebusch, 2000. "Assessing Nominal Income Rules for Monetary Policy with Model and Data Uncertainty," Econometric Society World Congress 2000 Contributed Papers 0065, Econometric Society.
  14. Hallsten, Kerstin, 2000. "An Expectations-Augmented Phillips Curve in an Open Economy," Working Paper Series 108, Sveriges Riksbank (Central Bank of Sweden).
  15. Svensson, Lars E O & Woodford, Michael, 2004. "Implementing Optimal Policy Through Inflation-Forecast Targeting," CEPR Discussion Papers 4229, C.E.P.R. Discussion Papers.
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  18. Nessen, Marianne, 2002. "Targeting inflation over the short, medium and long term," Journal of Macroeconomics, Elsevier, vol. 24(3), pages 313-329, September.
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  20. Michael T. Kiley, 1998. "Monetary policy under neoclassical and New-Keynesian Phillips Curves, with an application to price level and inflation targeting," Finance and Economics Discussion Series 1998-27, Board of Governors of the Federal Reserve System (U.S.).
  21. Fuhrer, Jeff & Moore, George, 1995. "Inflation Persistence," The Quarterly Journal of Economics, MIT Press, vol. 110(1), pages 127-59, February.
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  23. Vestin, David, 2000. "Price-level Targeting versus Inflation Targeting in a Forward-looking Model," Working Paper Series 106, Sveriges Riksbank (Central Bank of Sweden).
  24. Roberts, John M, 1995. "New Keynesian Economics and the Phillips Curve," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 975-84, November.
  25. Currie,David & Levine,Paul, 1993. "Rules, Reputation and Macroeconomic Policy Coordination," Cambridge Books, Cambridge University Press, number 9780521441964, October.
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