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On robustness of average inflation targeting

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  • Honkapohja, Seppo
  • McClung, Nigel

Abstract

This paper considers average inflation targeting (AIT) policy in a New Keynesian model with adaptive learning agents. There are stability concerns regarding AIT when agents have imperfect knowledge and the averaging window length is not public knowledge. These stability risks near the inflation target steady state would likely be avoided under inflation targeting (IT) or price level targeting (PLT). Near the zero interest rate steady state, AIT under-performs PLT and does not necessarily outperform IT. Communicating the averaging window length or adopting an asymmetric average inflation target that judges below-target average inflation more negatively avoids these pitfalls.

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  • Honkapohja, Seppo & McClung, Nigel, 2026. "On robustness of average inflation targeting," European Economic Review, Elsevier, vol. 183(C).
    • Handle: RePEc:eee:eecrev:v:183:y:2026:i:c:s0014292125002673
    DOI: 10.1016/j.euroecorev.2025.105217
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    2. Frantisek Masek & Jan Zemlicka, 2024. "Average Inflation Targeting: How far to look into the past and the future?," Working and Discussion Papers WP 5/2024, Research Department, National Bank of Slovakia.
    3. Salle, Isabelle L., 2023. "What to target? Insights from a lab experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 212(C), pages 514-533.
    4. Elfsbacka Schmöller, Michaela & Spitzer, Martin, 2022. "Lower for longer under endogenous technology growth," Bank of Finland Research Discussion Papers 6/2022, Bank of Finland.
    5. Ascari, Guido & Mavroeidis, Sophocles & McClung, Nigel, 2023. "Coherence without rationality at the zero lower bound," Journal of Economic Theory, Elsevier, vol. 214(C).
    6. Jia, Chengcheng & Wu, Jing Cynthia, 2023. "Average inflation targeting: Time inconsistency and ambiguous communication," Journal of Monetary Economics, Elsevier, vol. 138(C), pages 69-86.
    7. Piergallini, Alessandro, 2022. "Average inflation targeting and macroeconomic stability," Economics Letters, Elsevier, vol. 219(C).
    8. Philip R. Lane, 2021. "La stratégie de politique monétaire de la Banque centrale européenne," Revue d'économie financière, Association d'économie financière, vol. 0(4), pages 75-89.

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    Keywords

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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • 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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