Long-Run Inflationary Consequences of a Productivity Boom
Consider two hypothetical economies, Country A and Country B. Country A is a member of a large monetary union with a shared central bank that targets 2% inflation. Country B is not part of any monetary union and has its own independent central bank that also targets 2% inflation. Both countries experience an identical, permanent positive shock to their productivity growth. Analyze and explain why the long-run inflation rate in Country A will remain anchored at 2%, while Country B's central bank might need to adjust its policy to maintain its 2% target. In your answer, elaborate on the mechanisms that enforce the inflation anchor in Country A.
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