Would Households Understand Average Inflation Targeting?

44 Pages Posted: 4 Feb 2022 Last revised: 29 Mar 2022

See all articles by Mathias Hoffmann

Mathias Hoffmann

Deutsche Bundesbank

Emanuel Moench

Frankfurt School of Finance and Management

Lora Pavlova

Deutsche Bundesbank

Guido Schultefrankenfeld

Deutsche Bundesbank

Multiple version iconThere are 2 versions of this paper

Date Written: December 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 information about near-term inflation, individuals update their expected inflation path in line with the central banks' intentions. This is particularly true for individuals with high trust in the ECB. 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.

Keywords: Household Inflation Expectations, Monetary policy strategy, randomized control trial, survey data

JEL Classification: E31, E32, F33

Suggested Citation

Hoffmann, Mathias and Moench, Emanuel and Pavlova, Lora and Schultefrankenfeld, Guido, Would Households Understand Average Inflation Targeting? (December 2021). CEPR Discussion Paper No. DP16786, Available at SSRN: https://ssrn.com/abstract=4026651

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

Lora Pavlova

Deutsche Bundesbank ( email )

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

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