Is monetary policy credibility about to go?
Figure 1: Credibility in the euro area still holds up...but for how long?
Both the Fed and the ECB have been able to remain credible during the financial crisis since 2008. However, while the Fed has only seen a temporary decrease in credibility that was recovered almost in full subsequently, the ECB has not been able to regain the credibility it has lost since. We argue that since inflation performance in the two areas has been very similar in the past 8 years, the difference in the way that credibility has evolved is the result of the different macroeconomic policy mix applied. Therefore, also factors largely outside the control of the ECB have affected its credibility.
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