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International Finance Discussion Papers
The International Finance Discussion Papers logo links to the International Finance Discussion Papers home page Inflation Regimes and Inflation Expectations
Joseph E. Gagnon

Abstract:  There has been much talk in the popular press about the difficulty of attaining credibility in the bond markets for the low-inflation policies that have been adopted by a number of central banks in recent years. This credibility problem is particularly severe for those countries that have a history of high inflation. Gaining credibilty is often viewed in the context of learning by the public about the central bank's true intentions. However, this paper argues that a more important aspect of credibility--at lease for long-term inflation expectations--may be public views about how future changes in personnel, electoral results, or economic shocks may affect central bank behavior. In other words, there is always a positive probability that the current regime will end. Views about the nature of possible future regimes are likely to be influenced by observed past regimes.

Full paper (249 KB PDF)

Central bank, credibility, inflation target, monetary policy

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