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The Theory of Credibility and the Reputation-bias of Policy

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  • James Forder

Abstract

The theory of policy credibility has been influential in both the design of monetary policymaking institutions and in the implementation of policy. In particular, the idea that 'reputation' is important has been widely accepted. However, careful attention to the assumptions and implications of the theory reveals many sources of doubt as to its empirical value. First, the theory is implausible and, even if taken seriously, does not point to many of the conclusions frequently supposed to be based on it. Second, evidence suggests the theory is false. Third, even policymakers who profess themselves concerned about the maintenance of credibility do not behave consistently in the way the theory says they should. Although many policy proposals ostensibly based on the theory of credibility therefore seem to lack persuasive support, the idea of credibility still poses a danger to effective policymaking since it creates motives for excessively contractionary policy. Although it is frequently asserted that monetary policy can have no long-term effects on economic performance, the idea that a loss of 'reputation' will have lasting detrimental effects appears to motivate much policy. In the absence of convincing arguments that reputation - in its technical sense - is important, this would seem to be undesirable and probably dangerous.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Review of Political Economy.

Volume (Year): 13 (2001)
Issue (Month): 1 ()
Pages: 5-25

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Handle: RePEc:taf:revpoe:v:13:y:2001:i:1:p:5-25

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Citations

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Cited by:
  1. Philip Arestis & Alexander Mihailov, 2007. "Flexible Rules cum Constrained Discretion: A New Consensus in Monetary Policy," Economics & Management Discussion Papers em-dp2007-53, Henley Business School, Reading University.
  2. Bernd Hayo & Carsten Hefeker, 2001. "Do We Really Need Central Bank Independence? A Critical Re- examination," Macroeconomics 0103006, EconWPA.
  3. Deborah Mabbett & Waltraud Schelkle, 2014. "Searching under the lamp-post: the evolution of fiscal surveillance," Europe in Question Discussion Paper Series of the London School of Economics (LEQs) 5, London School of Economics / European Institute.
  4. Deborah Mabbett & Waltraud Schelkle, 2014. "Searching under the lamp-post: the evolution of fiscal surveillance," LEQS – LSE 'Europe in Question' Discussion Paper Series 75, European Institute, LSE.
  5. Hayo, Bernd & Hefeker, Carsten, 2002. "Reconsidering central bank independence," European Journal of Political Economy, Elsevier, vol. 18(4), pages 653-674, November.
  6. Ullrich, Katrin, 2003. "Unabhängigkeit und Verantwortlichkeit der Europäischen Zentralbank," ZEW Discussion Papers 03-65, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  7. James Forder, 2002. "Interests and 'Independence': The European Central Bank and the theory of bureaucracy," International Review of Applied Economics, Taylor & Francis Journals, vol. 16(1), pages 51-69.
  8. Pierre-Guillaume MÈon, 2004. "Why are realignments postponed? A model of exchange rate revisions with opportunistic governments," Manchester School, University of Manchester, vol. 72(3), pages 298-316, 06.

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