The credibility of monetary policy announcements: Empirical evidence for OECD countries since the 1960s

Abstract

Monetary policy rules have been considered as fundamental protection against inflation. However, empirical evidence for a correlation between monetary commitment to rules and price stability is relatively weak. We discuss likely causes for this weak link and argue that monetary commitment is not necessarily credible by itself without adequate policy assignment and an institutional framework enforcing the commitment. We further propose a proxy variable for monetary credibility in an empirical assessment of our theoretical arguments based on panel data covering 22 OECD countries and five decades. Results confirm the crucial role of a credibly backed monetary commitment for price stability.