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Quantifying Federal Reserve credibility

Author

Listed:
  • Stephen Hall

    (Department of Economics, Leicester University, Bank of Greece, and University of Pretoria)

  • George Tavlas

    (Bank of Greece and the Hoover Institution, Stanford University)

Abstract

We derive an index that quantifies the Federal Reserve’s credibility from 1965 until 2024. The credibility measure is derived by using the Kalman filter to extract an unobserved component from data, the movements of which are affected by central-bank credibility. We extend previous work using the Kalman filter in that we standardize the variables thought to affect credibility so that they have zero mean and unit variance. Consequently, there is no need to estimate parameters in the Kalman filter measurement equations. The credibility index is used to identify seven historical episodes during which the degree of credibility differed.

Suggested Citation

  • Stephen Hall & George Tavlas, 2025. "Quantifying Federal Reserve credibility," Working Papers 340, Bank of Greece.
    • Handle: RePEc:bog:wpaper:340
    DOI: 10.52903/wp2025340
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    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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