Macroeconomics, 2nd Edition by Pearson

424

MACROECONOMICS

2.

it does not have the obligation to finance the government’s deficit, and

3.

central bankers are appointed for long terms and cannot be replaced at the

whims of the executive or legislature.

15.5.5

Achieving Credibility

Another important aspect of the Barro–Gordon framework is its identification

of credibility as an important determinant of the real economic effects of mon-

etary policy. Monetary policy announcements are regarded as credible by pri-

vate agents to the extent that they base their inflation expectations on them.

If a central bank lacks credibility as we saw, the economy will move to point B