Year: 2020
Type: article
Abstract: The Great Recession and current pandemic have focused attention on the constraint on nominal interest rates from the effective lower bound. This has renewed interest in monetary policies that embed makeup strategies, such as price-level or average-inflation targeting. This paper examines the properties of average-inflation targeting in a two-agent New Keynesian (TANK) model in which a fraction of firms have adaptive expectations. We examine the optimal degree of history dependence under average-inflation targeting and find it to be relatively short for business cycle shocks of standard magnitude and duration. In this case, we show that the properties of the economy are quantitatively similar to those under a price-level target.
DOI: 10.24148/wp2020-21
Authors: Bank of Canada, Robert Amano, Stefano Gnocchi, Bank of Canada, Joel Wagner, Bank of Canada
Institutions: Federal Reserve Bank of San Francisco, Bank of Canada
Language: English
Domain: Social Sciences
Open Access status: bronze
OpenAlex ID: W3124817151