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Working Paper

Average Inflation Targeting: Time Inconsistency and Intentional Ambiguity

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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.
Topics
Inflation
Monetary policy
01.31.2022ISSN 2573-7953 WP 21-19ROriginal Paper WP 21-19DOI 10.26509/frbc-wp-202119r
Keywords inflation, monetary policy, central bank communication
JEL Classification Codes E52, E31, E58

Working Papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views expressed in this paper are those of the authors and do not represent the views of the Federal Reserve Bank of Cleveland or the Federal Reserve System.

Suggested Citation

Jia, Chengcheng , and Jing Cynthia Wu. 2022. “Average Inflation Targeting: Time Inconsistency and Intentional Ambiguity.” Federal Reserve Bank of Cleveland, Working Paper No. 21-19R. https://doi.org/10.26509/frbc-wp-202119r