The Evolution of Federal Reserve Credibility: 1978-1984
Authors: G. Hardouvelis and Sc. W. Barnhart
Journal: The Review of Economics and Statistics, August 1989, LXXI: 385-393
Abstract: A random coefficients Kalman filter model of the response of commodity prices to weekly MI announcements indicates a gradual evolution in the credibility of the Federal Reserve as an inflation fighter. The October 1979 announcement of a change in monetary policy aimed at reducing inflation did not result in an immediate increase in credibility, and the October 1982 announcement of a policy reversal did not diminish credibility. Credibility does vary with the underlying rate of inflation, which shows that markets pay attention to policy results not simply policy announcements.