The Slope of the Phillips Curve and the Optimal Average Inflation Targeting Window

The slope of the Phillips curve has been shown to be flatter in recent years, including in Australia. How does this impact the optimal targeting window for a central bank conducting an average inflation targeting policy? This article shows that, in the face of the flattening of the Phillips curve, it is desirable to increase the targeting window. Doing so would lead to lower inflation fluctuations and to a non‐trivial welfare gain. In a persistently higher‐than‐target inflation, high‐interest‐rate environment, this implies that the central bank should keep the nominal interest rate higher for longer.