Even if they believe the central bank, they may not still borrow since what they are trying to do is to get out of debt rather than get into further debt as is the case today. 15. So, how do central banks improve their credibility? By tying their promise of low interest rates to specific quantitative real sector variables?
The US Federal Reserve has recently led the way in this direction by saying that it will keep interest rates low as long as the unemployment rate remains above 6.5 per cent, and in the process, is willing to tolerate inflation slightly above its long-run target.