Average Is Good Enough: Average-Inflation Targeting and the ELB


Robert Amano

Stefano Gnocchi

Joel Wagner

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2020-21 | June 25, 2020

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.

Article Citation

Wagner, Joel, Robert Amano, Stefano Gnocchi, and Sylvain Leduc. 2020. “Average Is Good Enough: Average-Inflation Targeting and the ELB,” Federal Reserve Bank of San Francisco Working Paper 2020-21. Available at https://doi.org/10.24148/wp2020-21

About the Author
Sylvain Leduc
Sylvain Leduc is executive vice president and director of Economic Research at the Federal Reserve Bank of San Francisco. Learn more about Sylvain Leduc