DP16786 Would Households Understand Average Inflation Targeting?

Author(s): Mathias Hoffmann, Emanuel Moench, Lora Pavlova, Guido Schultefrankenfeld
Publication Date: December 2021
Date Revised: March 2022
Keyword(s): Household Inflation Expectations, Monetary policy strategy, randomized control trial, survey data
JEL(s): E31, E32, F33
Programme Areas: Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16786

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.