If central banks did not act to bring the economy out of slump, what would happen to those claims? Not only would output rise more slowly towards potential, but more importantly potential itself would be eroded.
I consider that firms’ and households’ medium- to long-term inflation expectations are mainly determined by supply-side factors – or, the economy’s growth potential – such as the potential growth rate and the labor productivity growth rate, rather than by factors such as the following: the level of the Bank’s price stability target; the supply and demand balances in goods and services, as well as in the labor market; and developments in the observed inflation rate.