DP16786 Would Households Understand Average Inflation Targeting?

Author(s): Mathias Hoffmann, Emanuel Moench, Lora Pavlova, Guido Schultefrankenfeld
Publication Date: December 2021
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 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.