According to various observers, monetary authorities in many advanced economies have not always clarified their objectives for price stability quantitatively. This paper studies the possible implications that such uncertainty could exert on the transmission of macroeconomic shocks in a New Keynesian model in which economic agents do not perfectly observe the inflation target.
In a context characterized by inflation target uncertainty, positive supply shocks can be recessionary rather than expansionary. Economic agents erroneously associate the resulting decline in inflation with a decrease in the inflation target. The recessionary effects become greater when the central bank is constrained in setting the monetary policy rates.
