Monetary policy strategies and credibility - theory and practice

The practice of monetary policy has changed markedly in recent years. In addition to changes in the technical operating procedures, monetary policy strategies have been the focus of increased attention over the past 30 years. Monetary policy has been fortunate in that the interaction between academic theory and practice has been particularly marked (see, e.g. Blinder,1998). King (2000) ascribes this to the large numbers of economists now working in central banking relative to other areas of economic policy. Whatever the reason, the interaction has been fruitful for those on both sides of the fence. The focus of this article is credibility. For central banks, for whom reputation is everything, credibility cuts to the heart of the issues that they constantly grapple with. It is also a field in which academic insight have helped confirm and formalise the hunches of practitioners and have led to concrete changes in the monetary policy strategies adopted.