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The Monetary Policy of the ECB and the Fed: Credibility versus Confidence, a Comparative Approach

In: Financial Developments in National and International Markets

Author

Listed:
  • Edwin Heron
  • Emmanuel Carré

Abstract

The rule versus discretion debate is used frequently to shed light on monetary policy, in particular to contrast the strategies of the ECB and the Fed: the ECB is rule-based, while the Fed is discretionary. This approach is irrelevant, because both central banks reject opposition as a misperception of their strategy. We also believe that this debate is no longer relevant. Credibility versus confidence appears to be much more useful for understanding the changes in monetary policy and the differences between the ECB and the Fed. By a strategy of ‘credibility’, we mean that a central bank that adopts a model of behaviour and then follows it. It says what it does, and does what it says. The simplified chain of the credibility strategy is Rule — Commitment — Enforcement — Transparency — Credibility. Credibility has evolved from new Classical Economics to propound an alternative to the rule issuing from the quantity theory of money.

Suggested Citation

  • Edwin Heron & Emmanuel Carré, 2006. "The Monetary Policy of the ECB and the Fed: Credibility versus Confidence, a Comparative Approach," Palgrave Macmillan Books, in: Philip Arestis & Jesus Ferreiro & Felipe Serrano (ed.), Financial Developments in National and International Markets, chapter 5, pages 77-102, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-0-230-52237-4_5
    DOI: 10.1057/9780230522374_5
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    Cited by:

    1. Edwin Le Heron, 2006. "Alan Greenspan, the confidence strategy," Brazilian Journal of Political Economy, Center of Political Economy, vol. 26(4), pages 502-517.

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