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

Edwin Heron and Emmanuel Carré

Chapter 5 in Financial Developments in National and International Markets, 2006, pp 77-102 from Palgrave Macmillan

Abstract: 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.

Keywords: Monetary Policy; Central Bank; Price Stability; Inflation Target; Inflation Expectation (search for similar items in EconPapers)
Date: 2006
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DOI: 10.1057/9780230522374_5

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