A Case Against Average Inflation Targeting

Abstract

Well-anchored inflation rate below a constant inflation target rate of 2% leads policymakers to seek make-up policies, including Average Inflation Targeting, Price Level Targeting, etc. In light of this, this article mainly aims to find out which policy rule - Average Inflation Targeting, Constant Inflation Targeting and Price Level Targeting - provides better macroeconomic performances at lower interest rates. Average Inflation Targeting policy is welfare improving against the Constant Inflation Targeting, but not Price Level Targeting. We conclude that a comparative application of the Price Level Targeting produces better macroeconomic performances, despite some weaknesses. We also discuss the source of the latest US inflation rate surge, and find that the design of the average inflation targeting policy can be responsible for extra inflation rate volatility.