A Measure for Credibility: Tracking US Monetary Developments

Maria Demertzis, Massimiliano Marcellino and Nicola Viegi ()

No ECO2008/38, Economics Working Papers from European University Institute

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.

Keywords: Great Inflation; Great Moderation; Anchors for Expectations (search for similar items in EconPapers)
JEL-codes: E52 E58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Date: 2008
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Working Paper: A Measure for Credibility: Tracking US Monetary Developments (2008)
Working Paper: A Measure for Credibility: Tracking US Monetary Developments (2008)
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Persistent link: http://EconPapers.repec.org/RePEc:eui:euiwps:eco2008/38

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