Central Bank Credibility and Inflation Expectations
Consider two hypothetical countries, A and B, both with a central bank that has an official inflation target of 2%. In Country A, the central bank has successfully kept inflation very close to its 2% target for the past decade. In Country B, inflation has frequently deviated from the 2% target, sometimes reaching as high as 5% and as low as 0%. Now, both countries experience an identical external shock that temporarily pushes inflation up to 4%. The central bank in Country A immediately and publicly implements policies designed to bring inflation back to its target. The central bank in Country B issues a statement reaffirming its commitment to the target but takes a 'wait-and-see' approach with no immediate policy changes. Based on this information, in which country are the public's long-term inflation expectations more likely to remain stable or 'anchored' near the 2% target? Explain your reasoning by contrasting the credibility of the two central banks.
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Introduction to Macroeconomics Course
Ch.5 Macroeconomic policy: Inflation and unemployment - The Economy 2.0 Macroeconomics @ CORE Econ
The Economy 2.0 Macroeconomics @ CORE Econ
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Analysis in Bloom's Taxonomy
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