The Credibility of Monetary Policy: A Survey of the Literature with Some Simple Applications to Canada

46 Pages Posted: 24 Feb 1997

See all articles by Robert A. Amano

Robert A. Amano

Bank of Canada & CREFE

Paul Fenton

Government of Canada - International Relations Department

David Tessier

Government of Canada - Bank of Canada

Simon van Norden

HEC Montreal - Department of Finance; CIRANO; University of Montreal - Center for Interuniversity Research in Econometrics

Date Written: Undated

Abstract

Since Kydland and Prescott published their famous article on rules versus discretion in 1977, the literature on the time-inconsistency problem of economic policy expanded rapidly. While much of the literature is highly technical and can seem esoteric, there is generally an underlying practicality to it, especially in the recent literature on institutional reform. Accordingly, the purpose of this paper is to survey the literature from the perspective of a central bank practitioner. We have three specific objectives. The first is to get a sense of why the credibility problem is important for the economy and for policymakers. The second is to draw some lessons from the literature that a monetary authority can use to enhance the credibility of its policy. And the third is to apply some simple tests of credibility from the literature to assess whether initiatives by the Bank of Canada to make the conduct of monetary policy more transparent and predictable have been successful. The paper is divided into three main parts; each devoted to one of these objectives. There is also a brief concluding section.

JEL Classification: E, F3

Suggested Citation

Amano, Robert A. and Fenton, Paul and Tessier, David and van Norden, Simon, The Credibility of Monetary Policy: A Survey of the Literature with Some Simple Applications to Canada (Undated). Available at SSRN: https://ssrn.com/abstract=3747 or http://dx.doi.org/10.2139/ssrn.3747

Robert A. Amano

Bank of Canada & CREFE ( email )

234 Wellington Street
Ottawa, Ontario K1A 0G9
Canada
613-782-8827 (Phone)
613-782-7163 (Fax)

Paul Fenton

Government of Canada - International Relations Department ( email )

234 Wellington Street
Ottawa, Ontario K1A 0G9
Canada
514-987-6181 (Phone)
514-987-8494 (Fax)

David Tessier

Government of Canada - Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

Simon Van Norden (Contact Author)

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada
514-340-6781 (Phone)
514-340-5632 (Fax)

HOME PAGE: http://svannorden.org

CIRANO ( email )

2020 rue University, 25th floor
Montreal H3C 3J7, Quebec
Canada

HOME PAGE: http://svannorden.org

University of Montreal - Center for Interuniversity Research in Econometrics ( email )

C.P. 6128, Succursale Centre-ville
Montreal, Quebec H3C 3J7
Canada

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