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Average Inflation Targeting: Time Inconsistency And Intentional Ambiguity

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Abstract

We study the implications of the Fed's new policy framework of average inflation targeting (AIT) and its ambiguous communication. The central bank has the incentive to deviate from its announced AIT and implement inflation targeting ex post to maximize social welfare. We show two motives for ambiguous communication about the horizon over which the central bank averages inflation as a result of time inconsistency. First, it is optimal for the central bank to announce different horizons depending on the state of the economy. Second, ambiguous communication helps the central bank gain credibility.

Suggested Citation

  • Chengcheng Jia & Jing Cynthia Wu, 2021. "Average Inflation Targeting: Time Inconsistency And Intentional Ambiguity," Working Papers 21-19R, Federal Reserve Bank of Cleveland, revised 01 Feb 2022.
    • Handle: RePEc:fip:fedcwq:93039
    DOI: 10.26509/frbc-wp-202119r
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    References listed on IDEAS

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    1. Nessen, Marianne & Vestin, David, 2005. "Average Inflation Targeting," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(5), pages 837-863, October.
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    4. Robert Amano & Stefano Gnocchi & Sylvain Leduc & Joel Wagner, 2020. "Average Is Good Enough: Average-Inflation Targeting and the ELB," Working Paper Series 2020-21, Federal Reserve Bank of San Francisco.
    5. Kinda Hachem & Jing Cynthia Wu, 2017. "Inflation Announcements and Social Dynamics," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 49(8), pages 1673-1713, December.
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    1. Budianto, Flora & Nakata, Taisuke & Schmidt, Sebastian, 2023. "Average inflation targeting and the interest rate lower bound," European Economic Review, Elsevier, vol. 152(C).

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    Keywords

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    JEL classification:

    • 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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