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Average Inflation Targeting: Time Inconsistency and Ambiguous Communication

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  • Chengcheng Jia
  • Jing Cynthia Wu

Abstract

We study the implications of average inflation targeting (AIT). AIT improves the inflation-output trade-off when the private sector believes the central bank’s announcement. Ex post, the central bank has the incentive to implement inflation targeting instead to maximize social welfare. Next, we examine whether and how the central bank can convince the private sector, and find ambiguous communication helps the central bank gain credibility and improve welfare. These results apply to several key aspects of AIT announcement and do not rely on specific modeling assumptions.

Suggested Citation

  • Chengcheng Jia & Jing Cynthia Wu, 2022. "Average Inflation Targeting: Time Inconsistency and Ambiguous Communication," NBER Working Papers 29673, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:29673
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    Cited by:

    1. Olesya V. Grishchenko & Franck Moraux & Olga Pakulyak, 2025. "How Stable are Inflation Expectations in the Euro Area? Evidence from the Euro-Area Financial Markets," Finance and Economics Discussion Series 2025-041, Board of Governors of the Federal Reserve System (U.S.).
    2. Hess T. Chung & Callum J. Jones & Antoine Lepetit & Fernando M. Martin, 2025. "Implications of Inflation Dynamics for Monetary Policy Strategies," Finance and Economics Discussion Series 2025-072, Board of Governors of the Federal Reserve System (U.S.).
    3. Budianto, Flora & Nakata, Taisuke & Schmidt, Sebastian, 2023. "Average inflation targeting and the interest rate lower bound," European Economic Review, Elsevier, vol. 152(C).
    4. Roberto Duncan & Enrique Martínez García & Luke Miller, 2025. "Tempting FAIT: Flexible Average Inflation Targeting and the Post-COVID U.S. Inflation Surge," Working Papers 2511, Federal Reserve Bank of Dallas.

    More about this item

    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

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