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A Measure for Credibility: Tracking US Monetary Developments

  • Demertzis, Maria
  • Marcellino, Massimiliano
  • Viegi, Nicola

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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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7036.

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Date of creation: Nov 2008
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Handle: RePEc:cpr:ceprdp:7036
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