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A Measure for Credibility: Tracking US Monetary Developments

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  • Maria Demertzis
  • Massimiliano Marcellino
  • Nicola Viegi

Abstract

Our objective is to identify a way of checking empirically the extent to which expectations are de-coupled from inflation, how well they might be anchored in the long run, and at what level. This methodology allows us then to identify a measure for the degree of anchorness, and as anchored expectations are associated with credibility, this will serve as a proxy for credibility. We apply this methodology to the US history of inflation since 1963 and examine how well our measure tracks the periods for which credibility is known to be either low or high. Of particular interest to the validity of the measure is the start of the Great Moderation. Following the narrative of a number of well documented incidents in this period, we check how well our measure captures both the evolution of credibility in US monetary policy, as well as reactions to inflation scares.

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Bibliographic Info

Paper provided by European University Institute in its series Economics Working Papers with number ECO2008/38.

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Date of creation: 2008
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Handle: RePEc:eui:euiwps:eco2008/38

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Keywords: Great Inflation; Great Moderation; Anchors for Expectations;

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References

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  1. Marvin Goodfriend, 2007. "How the World Achieved Consensus on Monetary Policy," NBER Working Papers 13580, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Malikane, Christopher & Mokoka, Tshepo, 2012. "Monetary policy credibility: A Phillips curve view," The Quarterly Review of Economics and Finance, Elsevier, vol. 52(3), pages 266-271.
  2. Ana Beatriz Galvao & Massimiliano Marcellino, 2010. "Endogenous Monetary Policy Regimes and the Great Moderation," Economics Working Papers ECO2010/22, European University Institute.
  3. Scott Davis, 2012. "The Effect of Commodity Price Shocks on Underlying Inflation: The Role of Central Bank Credibility," Working Papers 272012, Hong Kong Institute for Monetary Research.
  4. Timo Henckel & Gordon Menzies & Daniel J. Zizzo, 2013. "The Great Recession and the Two Dimensions of European Central Bank Credibility," Working Paper Series 13, Economics Discipline Group, UTS Business School, University of Technology, Sydney.
  5. Kliem, Martin & Kriwoluzky, Alexander & Sarferaz, Samad, 2013. "On the low-frequency relationship between public deficits and inflation," Discussion Papers 12/2013, Deutsche Bundesbank, Research Centre.
  6. Todd E. Clark & Troy Davig, 2008. "An empirical assessment of the relationships among inflation and short- and long-term expectations," Research Working Paper RWP 08-05, Federal Reserve Bank of Kansas City.
  7. Serkan ÇİÇEK & Cüneyt AKAR & Eray YÜCEL, 2011. "Türkiye’de enflasyon beklentilerinin çapalanması ve güvenilirlik," Iktisat Isletme ve Finans, Bilgesel Yayincilik, vol. 26(304), pages 37-55.

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