Abstract
An average inflation targeting (AIT) central bank adjusts policy when a moving average of recent inflation rates deviates from the long-run target inflation rate. It remains an open question whether there are desirable features for the central bank to be transparent about its averaging window, or whether there are gains to remaining ambiguous about the AIT. This paper investigates the implications of an ambiguous average inflation target in an environment where agents do not hold rational expectations. We develop a microfounded model where agents entertain multiple, subjective models of the law of motion of the economy. The models differ based on whether they give precedence to demand or supply shocks. We show that, contrary to the rational expectations equilibrium, ambiguity can result in widely different macroeconomic dynamics depending on which model prevails in equilibrium. We then study how a central bank can use ambiguity to influence the distribution of subjective beliefs to its advantage and achieve its stabilization objectives.