Abstract:
The purpose of this paper is two-fold: first, we propose a method for checking empirically
whether inflation expectations are anchored in the long run, and at what level. The extent of
anchoring then serves as a proxy for the credibility of the monetary authority. Second, to assess
how well this measure proxies credibility, we cross-check it against periods for which the level
of credibility is known and generally agreed upon. To this end, we apply our measure to the
US inflation history since 1963, which includes both the period of the Great Inflation, in which
credibility was poor and deteriorating, as well as the period of the Great Moderation during which
credibility in the monetary authority was gradually re-established. Finally we check what our
measure of credibility tells us about the crisis period.
