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)
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Last update: July 19, 2001