Average Inflation Targeting: Time Inconsistency And Intentional Ambiguity

Chengcheng Jia and Jing Cynthia Wu

No 21-19R, Working Papers from Federal Reserve Bank of Cleveland

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.

Keywords: Bayesian VARs; stochastic volatility; pandemics (search for similar items in EconPapers)
JEL-codes: E31 E52 E58 (search for similar items in EconPapers)
Pages: 52
Date: 2021-09-09, Revised 2022-02-01
New Economics Papers: this item is included in nep-ban, nep-cba, nep-cwa, nep-isf, nep-mac and nep-mon
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedcwq:93039

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DOI: 10.26509/frbc-wp-202119r

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