A central bank with a well-established reputation for maintaining price stability will likely need to enact more drastic and sustained increases in interest rates to counteract an unexpected inflationary pressure than a central bank with a weaker reputation.
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Figure 5.14: The Cost of Disinflation with Unanchored vs. Anchored Expectations
Central Bank Policy in Response to an Inflationary Shock
Two countries, Country A and Country B, experience an identical, unexpected surge in global energy prices, causing a temporary spike in inflation. The central bank of Country A has a long-established, proven track record of keeping inflation at its target, whereas the central bank of Country B has a history of prioritizing short-term employment over its inflation target. Based on this information, which of the following outcomes is most likely?
Building Central Bank Credibility
Impact of Central Bank Credibility on Economic Behavior
Related
Figure 5.14: The Cost of Disinflation with Unanchored vs. Anchored Expectations
Central Bank Policy in Response to an Inflationary Shock
Two countries, Country A and Country B, experience an identical, unexpected surge in global energy prices, causing a temporary spike in inflation. The central bank of Country A has a long-established, proven track record of keeping inflation at its target, whereas the central bank of Country B has a history of prioritizing short-term employment over its inflation target. Based on this information, which of the following outcomes is most likely?
Building Central Bank Credibility
Impact of Central Bank Credibility on Economic Behavior