Would households understand average inflation targeting?

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Publisher: Elsevier B.V.
Document Type: Report; Brief article
Length: 331 words

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Abstract :

Keywords Monetary policy strategy; Household inflation expectations; Randomized control trial; Survey data Highlights * In a randomized control trial, households are provided with information about alternative monetary policy strategies. * Households report significantly higher inflation expectations under the assumption of average inflation targeting (AIT). * The adjustment of the expected inflation path towards target is in line with the provided central bank communication. * Individuals with high (low) trust in the central bank adjust inflation expectations upwards (downward). * Calibrating two model economies to match the difference in medium-term inflation expectations from the survey results shows that, under AIT, inflation is substantially less volatile and the frequency of hitting the lower bound on interest rates is reduced. 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 we provide additional information about near-term inflation, for low levels of trust in the ECB the adjustment of inflation expectations tends to be negative while it is positive for intermediate and higher levels of trust. 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. Author Affiliation: (a) Deutsche Bundesbank, Wilhelm-Epstein-Str. 14, Frankfurt am Main D-60431, Germany (b) Frankfurt School of Finance & Management, Adickesallee 32--34, Frankfurt am Main D-60322, Germany (c) CEPR, United States (d) Karlsruhe Institute of Technology, Applied Econometrics, Campus B, Blücherstr. 17, Karlsruhe D-76185, Germany * Corresponding author. Article History: Received 30 November 2021; Revised 15 February 2022; Accepted 15 February 2022 Byline: Mathias Hoffmann [mathias.hoffmann@bundesbank.de] (*,a), Emanuel Moench [e.moench@fs.de] (b,c), Lora Pavlova [lora.pavlova@bundesbank.de] (a,d), Guido Schultefrankenfeld [guido.schultefrankenfeld@bundesbank.de] (a)

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Gale Document Number: GALE|A708650505