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Would households understand average inflation targeting?

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  • Hoffmann, Mathias
  • Pavlova, Lora
  • Mönch, Emanuel
  • Schultefrankenfeld, Guido

Abstract

Yes, they would. In a randomized control trial, we provide groups of respondents from the Bundesbank Online Panel Households with information about a hypothetical alternative ECB monetary policy regime akin to the Federal Reserve's flexible average inflation targeting (AIT). Inflation expectations significantly increase for the treated individuals. When provided with additional information about near-term inflation, individuals update their expected inflation path in line with the central banks' intentions. This is particularly true for individuals with high trust in the ECB. We assess the economic significance of our findings by comparing two model economies under different monetary policy strategies, calibrated to match the difference in medium-term inflation expectations from our survey results. Under AIT, inflation is substantially less volatile and the frequency of hitting the lower bound on interest rates is considerably reduced.

Suggested Citation

  • Hoffmann, Mathias & Pavlova, Lora & Mönch, Emanuel & Schultefrankenfeld, Guido, 2022. "Would households understand average inflation targeting?," Discussion Papers 17/2022, Deutsche Bundesbank.
    • Handle: RePEc:zbw:bubdps:172022
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    Cited by:

    1. Gabriele Galati & Richhild Moessner & Maarten van Rooij, 2022. "Reactions of household inflation expectations to a symmetric inflation target and high inflation (August 2022 update)," Working Papers 743, DNB.
    2. Szwacka-Mokrzycka Joanna & Marzena Lemanowicz, 2023. "The Influence of Inflation on the Economic Situation of Households in Poland," European Research Studies Journal, European Research Studies Journal, vol. 0(3), pages 119-132.
    3. Dräger, Lena, 2023. "Central Bank Communication with the General Public," Hannover Economic Papers (HEP) dp-713, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
    4. Coleman, Winnie & Nautz, Dieter, 2023. "Inflation target credibility in times of high inflation," Economics Letters, Elsevier, vol. 222(C).
    5. Moritz Grebe & Peter Tillmann, 2022. "Household Expectations and Dissent Among Policymakers," MAGKS Papers on Economics 202226, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    6. Grebe, Moritz & Tillmann, Peter, 2022. "Household expectations and dissent among policymakers," IMFS Working Paper Series 169, Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS).
    7. Hoffmann, Mathias & Mönch, Emanuel & Pavlova, Lora & Schultefrankenfeld, Guido, 2023. "Forceful or persistent: Wow the ECB's new inflation target affects households' inflation expectations," Discussion Papers 27/2023, Deutsche Bundesbank.
    8. Stéphane Dupraz & Hervé Le Bihan & Julien Matheron, 2022. "Make-up Strategies with Finite Planning Horizons but Forward-Looking Asset Prices," Working papers 862, Banque de France.
    9. Dobrew, Michael & Gerke, Rafael & Kienzler, Daniel & Schwemmer, Alexander, 2023. "Monetary policy rules under bounded rationality," Discussion Papers 18/2023, Deutsche Bundesbank.
    10. Ehrmann, Michael & Georgarakos, Dimitris & Kenny, Geoff, 2023. "Credibility gains from communicating with the public: evidence from the ECB’s new monetary policy strategy," Working Paper Series 2785, European Central Bank.
    11. Ahmad, Yamin & Murray, James, 2022. "Implications for Determinacy with Average Inflation Targeting," MPRA Paper 113119, University Library of Munich, Germany.
    12. Dräger, Lena & Lamla, Michael J., 2023. "Consumers' Macroeconomic Expectations," Hannover Economic Papers (HEP) dp-714, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
    13. Niizeki, Takeshi, 2023. "Trust in the central bank and inflation expectations: Experimental evidence," Economics Letters, Elsevier, vol. 231(C).

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    More about this item

    Keywords

    Monetary Policy Strategy; Household Inflation Expectations; Randomized Control Trial; Survey Data;
    All these keywords.

    JEL classification:

    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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