Inflation target credibility and the Taylor rule

Abstract We investigate how the monetary policy of the European Central Bank affects consumers' perceptions about the credibility of the inflation target. Monetary policy is assessed by the gap between the actual policy rate and a Taylor rate to approximate the interest rate expected by the public. Drawing on survey data for German consumers, our results suggest that the massive dent in inflation target credibility observed from 2021 to 2023 could have been ameliorated by a more decisive tightening of monetary policy. Therefore, simple outcome‐based interest rate rules may deserve more attention in the communication of monetary policy.