Constructing Reputation and Monetary Orthodoxy

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This chapter examines the process of reputation building and reputation consolidation of central banks and economic orthodoxy. Specifically, it offers a historical reconstruction of the way in which conservativeness and political neutrality became the tenets of modern central banks' reputation. The analysis is organized into three major historical junctures and the institutional developments that spanned each of them. The first juncture is the period of the Great Inflation, which gave rise to central banks' reputation as conservative institutions. The second juncture is the period broadly associated with the era of the Great Moderation, which ranged from the late 1980s until the beginning of the 2000s. In this period, the reputation of central banks was cemented, and the notion of monetary neutrality was clearly engrained in the institutional image of monetary authorities. Finally, the analysis focuses on Japan's “lost decade.” The Japanese experience in the 1990s is particularly important because, up to that point, Japan was the only high-income country to experience deflation since the 1930s. The Japanese experience thereby provides a glimpse into the problems that independent and reputable central banks might have confronted in the context of low inflation.