A1407
Title: Asymmetric inflation target credibility
Authors: Dieter Nautz - Freie Universitaet Berlin (Germany) [presenting]
Abstract: Inflation targets are a major tool for central banks to anchor the inflation expectations of the public. The literature typically assumes that the effects of, e.g. demographics and observed rates of inflation on inflation expectations, the inflation target credibility (ITC) are symmetric. However, there is increasing evidence that consumers assess inflation rates below and above the target very differently. The role of asymmetries is investigated for expectation formation and the credibility of the ECB's inflation target. A unique online survey containing over 180,000 daily responses is exploited by German consumers. Covering the period from January 2019 to June 2023, the dataset allows for estimation of the effect of positive as well as negative deviations of inflation from the ECB's 2\% target on ITC. The response of ITC is found to deviate from the target is asymmetrical, i.e. credibility responds significantly and plausibly signed to target deviations only when inflation is above target. By contrast, when inflation is below target, credibility cannot be improved by the central bank by raising the inflation rate to close the gap. The degree of asymmetry depends on demographics: when inflation is below target, rising inflation even decreases credibility for East Germans, persons with no college degree and people aged above 50. The results suggest that central bank communication should account for asymmetric inflation target credibility and the heterogeneity of the public.
