The Taylor curve and the variability tradeoff Let us begin by asking what economic theory has to say about the relationship of output volatility and inflation volatility. To keep matters simple, I will make the strong (but only temporary!)
Thus, the targets provide a check on systematic errors in estimating potential output. However, if monetary policy is going to take account of such signals, the central bank had better make sure that its inflation-control strategy is a credible one. Why?