Central bank credibility pulls expectations down

Step by step

1. 1

   The economy sits on a high short-run curve: inflationinflationA sustained rise in the overall price level, eroding money's purchasing power. is embedded in what people expect.

2. 2

   The central bank commits publicly to a 2 to 3 percent target and proves it will hold rates high to get there.

3. 3

   Wage bargains and price plans are written on lower expected inflationinflationA sustained rise in the overall price level, eroding money's purchasing power., and the SRPC slides down.

4. 4

   Same unemployment, less inflationinflationA sustained rise in the overall price level, eroding money's purchasing power.. Credibility is what made the tradeoff improve without a deeper recession.

Where this shows up

Examiners ask this as: credibility, disinflation, volcker, inflation targeting, expectations fall.