Permanent declines in inflation such as those seen in Chile and Sweden must have been a result of:
A) an increase in the central bank's inflation target.
B) a decrease in the central bank's inflation target.
C) less independence for their central banks.
D) a change to targeting interest rates instead of inflation rates.

Question

Quizplus · Accepted Answer

A decrease in the central bank's inflation target can lead to a permanent decline in inflation as it signals commitment to lower inflation and can anchor inflation expectations. This has been observed in countries like Chile and Sweden, which lowered their inflation targets in the 1990s, leading to sustained low inflation rates. The other options are not supported by empirical evidence.

Permanent Declines in Inflation Such as Those Seen in Chile