Average inflation targeting and interest-rate smoothing
- Authors
- Eo, Yunjong; Lie, Denny
- Issue Date
- 4월-2020
- Publisher
- ELSEVIER SCIENCE SA
- Keywords
- New Keynesian model; History-dependent policy; Welfare analysis; Ramsey policy; Interest-rate rule; Monetary policy inertia
- Citation
- ECONOMICS LETTERS, v.189
- Indexed
- SSCI
SCOPUS
- Journal Title
- ECONOMICS LETTERS
- Volume
- 189
- URI
- https://scholar.korea.ac.kr/handle/2021.sw.korea/56743
- DOI
- 10.1016/j.econlet.2020.109005
- ISSN
- 0165-1765
- Abstract
- We study the welfare implication of average inflation targeting as a simple interest-rate rule, in which the monetary authority adjusts its short-term policy rate in response to the output gap as well as average inflation deviation from its target instead of reacting to the contemporaneous inflation rate as in a Taylor-type rule. We find that the welfare improvement achieved by switching to average inflation targeting from a standard Taylor rule is modest with a high degree of interest-rate smoothing, whereas it is significant without interest-rate smoothing. We show that average inflation targeting is welfare-improving in the same way as interest-rate smoothing by making the conduct of monetary policy history-dependent. Thus, the high degree of monetary policy inertia in the estimated interest-rate rules in many advanced economies implies that the welfare gain from adopting the average inflation targeting rule would be minimal. (c) 2020 Elsevier B.V. All rights reserved.
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Collections - College of Political Science & Economics > Department of Economics > 1. Journal Articles
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