Consequently, the deterioration of the terms-of-trade in oil importing countries, appears to have been counterbalanced by higher demand for their goods from the countries that demand more energy. However, again, the monetary policy framework and increased credibility of monetary policy help explain the more muted output response. Central banks may face less of a trade off between output and inflation14.
Because the dynamics of inflation are strongly affected by inflation expectations, a credible central bank has the ability to contain inflation without substantially reducing output, since the knowledge that action will be taken if necessary may itself be sufficient.