A Credibility Measure: Tracking US Monetary Developments∗

We identify empirically the extent to which expectations are de-coupled from inflation, how well they are anchored in the long run, and at what level. We thus construct a measure for how well expectations are anchored, which serves as a proxy for credibility. We apply this methodology to US inflation since 1963, and examine how well our measure tracks the periods for which credibility is known to be either low or high. Following the narrative of a number of well documented incidents in the period of the Great Moderation, we check how well our measure captures both the evolution of credibility in US monetary history, as well as reactions to inflation scares