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Average Inflation Targeting

Listed author(s):
  • Nessén, Marianne

    ()

    (Research Department, Central Bank of Sweden)

  • Vestin, David

    ()

    (Institute for International Economic Studies)

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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File URL: http://www.riksbank.com/upload/4674/wp_119.pdf
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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
Publication status: Published in Journal of Money, Credit and Banking, 2005, pages 837-864.
Handle: RePEc:hhs:rbnkwp:0119
Contact details of provider: Postal:
Sveriges Riksbank, SE-103 37 Stockholm, Sweden

Phone: 08 - 787 00 00
Fax: 08-21 05 31
Web page: http://www.riksbank.com/
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