Such inflation surprises, of course, erode the value of private sector savings and, in time, lead to a de-anchoring of inflation expectations. Clearly, an inflation target committed to by the central bank (and, in the case of Canada, agreed to jointly with the federal government) can help offset this incentive. Accordingly, models with inflation commitments tend to predict a lower stock of government debt.
As well, the credible inflation commitment gives both monetary and fiscal policy the ability to offset macroeconomic fluctuations. Because inflation stability emerges only when the economy is sustainably at full capacity, the coordination problem between monetary and fiscal policy is highly simplified when there is such a joint commitment to inflation targets.