In both monetary and ﬁscal policy, there are incentives for policymakers to announce a certain course of action today and deviate from it tomorrow. For example, the government could announce to seek price stability, but then trade it off for lower unemployment in the short run by creating surprise inﬂation. Of course, people might be fooled once or twice, but not all the time.
Rational agents anticipate policymakers’ behaviour and they adjust prices and wages accordingly, causing higher inﬂation without any reduction in unemployment. [1] The result is an inﬂation bias. To get rid of it, authorities must be able to credibly commit to price stability. In practice, this has been achieved by delegating this objective to central banks and granting them independence.