Why is commitment to rules (e.g. Inflation Targeting) so important for functioning monetary policy in a world where individuals understand incentive structures and form expectations accordingly?
The theoretical literature from the 1970ies and 1980ies emphasizes the role of inflation expectations which are an anchor of the Phillips Curve trade-off. Successful central bank policy requires also to manage these expectations. This is possible only if announced central bank policies are credible. The theoretical literature about this "rules versus discretion" debate and the lessons from it are summarized in this series of short lectures.