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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)

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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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Publisher 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
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Related research
Keywords: Optimal monetary policy; Inflation targeting; Optimal delegation;

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Find related papers by JEL classification:
E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    Other versions:
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  8. Robert Dittmar & William T. Gavin, 2000. "What do New-Keynesian Phillips Curves imply for price-level targeting?," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 21-30. [Downloadable!]
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  21. Mervyn King, 1999. "Challenges for monetary policy : new and old," Proceedings, Federal Reserve Bank of Kansas City, pages 11-57. [Downloadable!]
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    Other versions:
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