DP16001 On Robustness of Average Inflation Targeting
This paper considers the performance of average inflation targeting
(AIT) policy in a New Keynesian model with adaptive learning agents.
Our analysis raises concerns regarding robustness of AIT when agents
have imperfect knowledge. In particular, the target steady state can
be locally unstable under learning if details about the policy are not
publicly available. Near the low steady state with interest rates at
the zero lower bound, AIT does not necessarily outperform a standard
inflation targeting policy. Policymakers can improve outcomes
under AIT by (i) targeting a discounted average of inflation, or (ii)
communicating the data window for the target.