Presenter: Cynthia Wu
Affiliation: University of Notre Dame, Department of Economics
Date: December 28, 2021.
Time: 13:00 GMT
We study the implications of the Fed’s new policy framework of average inflation targeting (AIT) and its ambiguous communication. The central bank has the incentive to deviate from its announced AIT, which improves the trade-off between inflation and real activity and implement inflation targeting ex-post to maximize social welfare. We show two motives for ambiguous communication about the horizon over which the central bank averages inflation as a result of time inconsistency. First, it is optimal for the central bank to announce different horizons depending on the state of the economy. Second, ambiguous communication helps the central bank to gain credibility.
Coauthor: Chengcheng Jia (Federal Reserve Bank of Cleveland).