Enhancing Fed Credibility |
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Authors: | Janet Yellen |
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Institution: | (1) Office of President, Federal Reserve Bank of San Francisco, San Francisco, CA 94120, USA |
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Abstract: | The Fed's credibility regarding control of inflation helps to anchor public expectations of price stability. This makes the
Fed's actions more predictable in any given set of circumstances and thus strengthens the monetary policy transmission mechanism
and shortens policy lags. The importance of the Fed's credibility can be illustrated by the consequences of its absence in
the 1970s. This paper discusses the roots of the Fed's current credibility: a systematic approach to controlling inflation,
transparency of its policy decisions, and timely communication of the decisions and the considerations upon which they are
based. The paper also discusses areas in which there is room for further improvement. It argues that the most important future
step would be to adopt specific inflation targets. Such a step would not only enhance credibility, it would help to focus
policy-making itself. While there are some risks to establishing specific numerical targets, these risks can be managed and
are outweighed by the benefits of explicit targets.
JEL Classification E58 |
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Keywords: | Federal Reserve central bank FOMC transparency |
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