Central Banker Credibility

To be or to seem to be
That is the question


Sometimes I get a bit too clever with my choice of words to the point where even I lose track of the meaning. The desire to make something sound brilliant gets in the way of actually being so, if such is possible for a hacker like myself. When I read What have we learned since October 1979 by Fed Chairman Bernanke, I chuckled a bit, remembering times I had confused myself. Perhaps I'm still confused but discussions of Central Banker credibility as something distinct from their actual record seems silly to me.

Here's an excerpt:

Central bankers have long recognized at some level that the credibility of their pronouncements matters. I think it is fair to say, however, that in the late 1960s and 1970s, as the U.S. inflation crisis was building, economists and policymakers did not fully understand or appreciate the determinants of credibility and its link to policy outcomes. Specifically, Kydland and Prescott demonstrated why, in many situations, economic outcomes will be better if policymakers are able to make credible commitments, or promises, about certain aspects of the policies they will follow in the future. "Credible" in this context means that the public believes that the policymakers will keep their promises, even if they face incentives to renege.

Note that credible doesn't mean that they actually stuck to their promise but that the public believes they will. It seems to me inflation didn't fall in the early 80s because the public believed Volcker would follow through on his promise to tighten but because be actually tightened, substantially. It also seems to me that inflation rose in the late 60s and early 70s not because Martin or Burns did not fully understand or appreciate the determinants of credibility but because they provided too much monetary accommodation, as they both admit.

Bernanke goes on:

If the policymakers' statements are believed (that is, if they are credible), then the public will expect inflation to be low, and demands for wage and price increases should accordingly be moderate. In a virtuous circle, this cooperative behavior by the public makes the central bank's commitment to low inflation easier to fulfill. In contrast, if the public is skeptical of the central bank's commitment to low inflation (for example, if it believes that the central bank may give in to the temptation to overstimulate the economy for the sake of short-term employment gains), then the public's inflation expectations will be higher than they otherwise would be.

Is he arguing that economics or monetary policy is all a con game?

To me the study of credibility distinct from the sense derived from true fulfillment of obligation is a study in the art of deception. Let me use small words so I don't get confused. They want to know how long lies last.

Why?