https://doi.org/10.52903/wp2025340
QUANTIFYING FEDERAL RESERVE CREDIBILITY
Stephen G. Hall
Department of Economics, Leicester University, Bank of Greece, and University of Pretoria
George S. Tavlas
Bank of Greece and the Hoover Institution, Stanford University
ABSTRACT
We derive an index that quantifies the Federal Reserve’s credibility from 1965 until 2024. The credibility measure is derived by using the Kalman filter to extract an unobserved component from data, the movements of which are affected by central-bank credibility. We extend previous work using the Kalman filter in that we standardize the variables thought to affect credibility so that they have zero mean and unit variance. Consequently, there is no need to estimate parameters in the Kalman filter measurement equations. The credibility index is used to identify seven historical episodes during which the degree of credibility differed.
Keywords: central bank credibility, Federal Reserve, Kalman filter, unobserved component
JEL-classifications: C32, E52, E58
Acknowledgements: We thank Elisavet Bosdelekidou and Maria Monopoli for research assistance.
Disclaimer: The views expressed in this paper are those of the authors and not necessarily those of either the Bank of Greece or the Eurosystem.
Corresponding author:
George Tavlas
Bank of Greece
21 E. Venizelos Ave., Athens, 102 50, Greece
Tel. no. +30 210 320 2370
email: gtavlas@bankofgreece.gr