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Central Bank's Ongoing Mandate
Imagine a central bank with a stated inflation target of 2% raises interest rates to combat an inflation rate of 5%. After several months, inflation has only fallen to 4%. In the context of a committed inflation-targeting policy, what is the bank's primary responsibility now, and what does this reveal about the nature of this policy framework?
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Ch.5 Macroeconomic policy: Inflation and unemployment - The Economy 2.0 Macroeconomics @ CORE Econ
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A country's central bank has a publicly stated goal of maintaining inflation at 2%. After a supply shock, inflation rises to 6%. The bank responds by increasing its main policy interest rate by 0.75%. However, after six months, inflation has only decreased to 5%, remaining significantly above the goal. Based on the principles of a committed inflation-targeting framework, what is the most appropriate subsequent action for the central bank?
Evaluating Central Bank Communication and Commitment
Under an inflation-targeting framework, if a central bank raises interest rates to combat high inflation but inflation remains above target after six months, the bank has fulfilled its primary obligation by taking a decisive initial action, and no further immediate policy adjustments are required.
Central Bank's Ongoing Mandate
The Rationale for Persistent Policy Adjustment in Inflation Targeting