Scandinavian Working Papers in Economics
Working Paper Series,
Sveriges Riksbank (Central Bank of Sweden)
No 119: Average Inflation Targeting
Marianne Nessén () and David Vestin ()
Additional contact information
Marianne Nessén: Research Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
David Vestin: Institute for International Economic Studies, Postal: Stockholm University, SE-106 91 Stockholm, Sweden
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.
Keywords: Optimal monetary policy; Inflation targeting; Optimal delegation
45 pages, December 1, 2000
Full text files
wp_119.pdf
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