Would Households Understand Average Inflation Targeting?

46 Pages Posted: 5 Oct 2021 Last revised: 6 Dec 2021

See all articles by Mathias Hoffmann

Mathias Hoffmann

Deutsche Bundesbank

Emanuel Moench

Frankfurt School of Finance and Management

Guido Schultefrankenfeld

Deutsche Bundesbank

Lora Pavlova

Deutsche Bundesbank

Multiple version iconThere are 2 versions of this paper

Date Written: December 1, 2021

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 provided with additional assumptions about current inflation, individuals update their expected inflation path in line with the central banks’ intentions. Individuals with a high trust in the ECB’s ability to achieve price stability adjust their inflation expectations particularly strongly. 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. Inflation is substantially less volatile and the frequency of hitting the lower bound of interest rates considerably reduced under AIT.

Suggested Citation

Hoffmann, Mathias and Moench, Emanuel and Schultefrankenfeld, Guido and Pavlova, Lora, Would Households Understand Average Inflation Targeting? (December 1, 2021). Available at SSRN: https://ssrn.com/abstract=3936440 or http://dx.doi.org/10.2139/ssrn.3936440

Mathias Hoffmann (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Emanuel Moench

Frankfurt School of Finance and Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

Guido Schultefrankenfeld

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Research Centre
Frankfurt/Main, DE Hesse 60431
Germany

HOME PAGE: http://www.bundesbank.de/research_guido_schultefrankenfeld

Lora Pavlova

Deutsche Bundesbank

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
136
Abstract Views
399
rank
293,354
PlumX Metrics