Working Paper: NBER ID: w29673
Authors: Chengcheng Jia; Jing Cynthia Wu
Abstract: We study the implications of average inflation targeting (AIT). AIT improves the inflation-output trade-off when the private sector believes the central bank’s announcement. Ex post, the central bank has the incentive to implement inflation targeting instead to maximize social welfare. Next, we examine whether and how the central bank can convince the private sector, and find ambiguous communication helps the central bank gain credibility and improve welfare. These results apply to several key aspects of AIT announcement and do not rely on specific modeling assumptions.
Keywords: No keywords provided
JEL Codes: E31; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| average inflation targeting (AIT) (E31) | improved inflation-output dynamics (E31) |
| private sector's belief in the central bank's commitment (E58) | improved inflation-output dynamics (E31) |
| ambiguous communication (D83) | central bank's credibility (E58) |
| central bank's credibility (E58) | social welfare (I38) |
| central bank's incentive to deviate from communicated objectives (E61) | time-inconsistent equilibrium (D52) |
| social learning among agents (C92) | long-term credibility of central bank's announcements (E58) |