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To Change, or Not to Change the Inflation Target: Credibility is the Question

Author

Listed:
  • Ambrocio, Gene
  • Ferrero, Andrea
  • Jokivuolle, Esa
  • McClung, Nigel
  • Ristolainen, Kim

Abstract

We study the tradeoff between a lower frequency of zero lower bound (ZLB) episodes and a loss of credibility for a central bank in relation to an increase of its inflation target. First, we present novel evidence on the relevance of both sides of the tradeoff for changing the inflation target from a survey of economists. Second, we analyze the ZLB-credibility tradeoff in a New Keynesian model featuring an occasionally-binding constraint on the nominal interest rate and a share of agents who form their expectations adaptively, which is negatively related to the degree of credibility of the central bank. For a given level of the inflation target, the ZLB frequency is higher for lower levels of credibility. A target raise aiming to reduce the ZLB frequency may backfire if a simultaneous loss of credibility occurs.

Suggested Citation

  • Ambrocio, Gene & Ferrero, Andrea & Jokivuolle, Esa & McClung, Nigel & Ristolainen, Kim, 2026. "To Change, or Not to Change the Inflation Target: Credibility is the Question," CEPR Discussion Papers 21368, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:21368
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    Keywords

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    JEL classification:

    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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