Research Discussion Paper – RDP 2025-02 Boundedly Rational Expectations and the Optimality of Flexible Average Inflation Targeting

Contents

• Introduction
• The Model
• Optimal Policy – The Unconstrained Case
• Optimal Policy – The Constrained Case
• Comparing Target Criteria
• Conclusion
• Appendix A: Derivations
• Appendix B: Further Results
• Appendix C: Optimal Policy with Infinite-horizon Phillips Curve
• Appendix D: Robustly Optimal Policy in the Unconstrained Case
• References

We thank Bruce Preston, Ippei Fujiwara, Nigel McClung, Matthew Read, and Jonathan Hambur for helpful comments and suggestions. We thank seminar participants at the Bank of Finland and the organisers of the Workshop of the Australasian Economic Society 2022, Econometric Society Australasian Meetings 2023, and the 2023 Reserve Bank of Australia's Quantitative Macroeconomics Workshop for allowing us to present. The views expressed in this paper are those of the authors and should not be attributed to the Reserve Bank of Australia. Any errors are the sole responsibility of the authors.

Endnotes

Economic Research Department, Reserve Bank of Australia [*]

School of Economics, The University of Sydney [**]