Working Paper Revision

Average Inflation Targeting: Time Inconsistency And Intentional Ambiguity

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;

JEL Classification: E31; E52; E58;

https://doi.org/10.26509/frbc-wp-202119r

Bibliographic Information

Provider: Federal Reserve Bank of Cleveland

Part of Series: Working Papers

Publication Date: 2022-02-01

Number: 21-19R

Related Works

• Working Paper Revision: Average Inflation Targeting: Time Inconsistency And Intentional Ambiguity