Credibility and Monetary Policy

According to my dictionaries, "credibility" is the property of being credible, with the latter meaning roughly the same as believable. So with this definition, a policy lacks credibility if it is one that could not reasonably be believed. It would appear that William Fellner (1976, 1979), who introduced the idea into the macroeconomic arena, chose this particular word because he believed that the U.S. aggregate demand policy of the middle to late 1970s was unsustainable and in that sense unbelievable. With the passage of time, the term has come to be used in a slightly different way, in particular, as meaning "believed" rather than 'believable." In what follows, the term will be used in this latter fashion: Credibility obtains to the extent that beliefs concerning policy conform to the way in which policy is actually being conducted and to official announcements about its conduct. It should be emphasized'that this meaning is conceptually quite distinct from that pertaining to a situation in which it is expected that future rates of inflation will be small. As it happens, interest in the notion was from the start stimulated by Fellner's argument that a credible (believed) disinflation would be less costly, in terms of foregone output, than one that the public expected to be aborted. Because of this interest in disinflation, much of the discussion has been conducted under the presumption that prevailing policy is of a type that will lead to a low inflation rate in the future, and that in