Central-Bank Credibility: Why Do We Care? How Do We Build It?

Abstract

In a word, credibility matters in theory, and it is certainly believed to matter in practice.Empirical evidence on this point, however, is hard to come by because credibility is not easy to measure. 3 This paper seeks to shed light on two main issues: Why and how?Why is credibility so important to central bankers?And how can a central bank create or enhance credibility?I investigate these questions in a rather unconventional way.During the summer of 1998, I mailed a questionnaire to the heads of 127 central banks--the entire membership of the Bank for International Settlements 4 --soliciting their opinions on a variety of issues related to central bank credibility.The response rate was gratifyingly (I might say amazingly) high: 84 of the 127 banks responded, for a response rate of 66%.Their answers provide the main data for this study.5 While I tabulated the answers for OECD central banks and non-OECD central banks separately, I report here mainly the results for the pooled sample of all central banks because--with only a few exceptions--the two groups gave similar responses.6 My primary interest was in the views of actual central bankers.But I sent a substantially identical questionnaire to a similarly-sized sample of (mostly academic) economists who specialize in monetary economics or macroeconomics.7 The purpose was to ascertain whether and how the views of the academics differed from those of the central bankers.Differences might emerge for several reasons.Most obviously, the economists are theorists and econometricians rather than practitioners.In addition, almost all of the economists were either raised or educated in the United States (or both)-whereas the central bankers come from 84 different countries.Somewhat to my