The paper proposes a new measure of the degree of credibility of the Federal Reserve. We estimate a medium-scale macroeconomic model, where the central bank has access to a commitment technology, but where a regime-switching process governs occasional re-optimizations of announced plans. The framework nests the commonly used discretion and commitment cases, while allowing for a continuum of intermediate cases. Our estimates reject both full-commitment and discretion. We instead identify occasional re-optimization episodes both before and during the Great Moderation period. Finally, through counterfactual analyses we assess the role of credibility over the past four decades.
Debortoli, Davide, and Aeimit Lakdawala.
"How Credible Is the Federal Reserve? A Structural Estimation of Policy Re-optimizations."
American Economic Journal: Macroeconomics,
Positive Analysis of Policy Formulation and Implementation
Price Level; Inflation; Deflation
Business Fluctuations; Cycles
Central Banks and Their Policies
Policy Objectives; Policy Designs and Consistency; Policy Coordination