How central banks cope with price instabilities: Ambiguous inflation targets as organizational compromise

Abstract

Inflation is a central issue in the current economic and geopolitical crisis. Since the 1980s, its stabilization has been an objective of Western central banks: they communicate an inflation target that is supposed to “anchor” the expectations. Contrary to theoretical recommendations, most central banks have maintained a vagueness in their quantification of the target, whether in the form of a range of rates or an assessment such as “below” or “on average” (e.g. the Fed or the ECB). After outlining four explanations of this fact from the literature, this paper presents a fifth explanation based on a historical case study of the Belgian Central Bank, according to which the vagueness of the inflation target constitutes a “device” allowing central bankers to establish intra- and inter-organizational compromises.