If a central bank is not credible in its task of fighting inflation, private expectations of higher inflation will likely develop.

Question

Quizplus · Accepted Answer

If a central bank is not credible in its task of fighting inflation, the public may lose faith in the central bank's ability to control inflation, and expect higher rates of inflation in the future. This can lead to a self-fulfilling prophecy of higher inflation as people adjust their behavior and expectations accordingly.

If a Central Bank Is Not Credible in Its Task