Average Inflation Targeting in a Behavioral Heterogeneous Agent New Keynesian Model

45 Pages Posted: 4 Jan 2023 Last revised: 29 Aug 2023

See all articles by Frantisek Masek

Frantisek Masek

Sapienza University of Rome - Department of Economics and Law

Jan Žemlička

CERGE-EI

Date Written: January 4, 2023

Abstract

We analyze the optimal window length in the average inflation targeting rule within a Behavioral THANK model. The central bank faces an occasionally binding effective lower bound (ELB) or persistent supply shocks, and can also use quantitative easing. We show that the optimal averaging period is infinitely long in the case of a conventional degree of myopia. Finite yet long-lasting windows dominate for higher cognitive discounting. We solve the model both locally and globally to disentangle the effects of uncertainty about hitting the ELB in the future, which leads to a downward inflation bias for the global solution. The welfare loss difference between solution techniques is considerably decreasing in the degree of history dependence.

Appendix available https://ssrn.com/abstract=4359563

Keywords: Monetary Policy, Average Inflation Targeting, Heterogeneous Agents, Behavioral Macroeconomics

JEL Classification: E31, E32, E52, E58, E71

Suggested Citation

Masek, Frantisek and Žemlička, Jan, Average Inflation Targeting in a Behavioral Heterogeneous Agent New Keynesian Model (January 4, 2023). Available at SSRN: https://ssrn.com/abstract=4317442 or http://dx.doi.org/10.2139/ssrn.4317442

Frantisek Masek (Contact Author)

Sapienza University of Rome - Department of Economics and Law ( email )

Via del Castro Laurenziano 9
Rome, IA Rome 00161
Italy

Jan Žemlička

CERGE-EI ( email )

Politickych veznu 7
Prague, 111 21
Czech Republic

HOME PAGE: http://janzemlicka.crd.co/

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