Final answer:
Inflation targeting improves central bank credibility by showing a commitment to price stability, reducing uncertainty, and minimizing political pressures, leading to trusted and effective monetary policy.
Step-by-step explanation:
Inflation targeting enhances central bank credibility by demonstrating a clear and consistent commitment to price stability. This policy choice signals to markets and the public that the central bank prioritizes controlling inflation, which can reduce uncertainty and build trust. Improved credibility can lead to more effective monetary policy, as expectations remain anchored, reducing the risk of volatile inflation and interest rates.
With a public commitment, central banks less likely succumb to political pressures, further bolstering their reputation for maintaining macroeconomic stability.