Would Households Understand Average Inflation Targeting?

Yes, they would. We collect medium- and longer-term inflation expectations from 9,000individuals in Germany. Unconditionally, the average probability mass is well-centeredaround the ECB’s inflation aim of 2%. In a randomized control trial, we subject groupsof respondents with information about a hypothetical alternative ECB monetary policyregime akin to the Federal Reserve’s flexible average inflation targeting (AIT). Inflationexpectations significantly increase for the treated individuals. When provided with additionalassumptions about current inflation, individuals update their expected inflation pathin line with the central banks’ intentions. Individuals with a high trust in the ECB’s abilityto achieve price stability adjust their inflation expectations particularly strongly. We assessthe economic significance of our findings by comparing two model economies under differentmonetary policy strategies, calibrated to match the difference in medium-term inflationexpectations from our survey results. Inflation is six times less volatile and the frequencyof hitting the lower bound of interest rates substantially reduced under AIT