Research Discussion Paper – RDP 9701 Inflation Regimes and Inflation Expectations
May 1997
Abstract
There has been much talk in the popular press about the difficulty of attaining credibility in the bond markets for the low-inflation policies that have been adopted by a number of central banks in recent years. This credibility problem is particularly severe for those countries that have a history of high inflation. Gaining credibility is often viewed in the context of learning by the public about the central bank's true intentions. However, this paper argues that a more important aspect of credibility – at least for long-term inflation expectations – may be public views about how future changes in personnel, electoral results, or economic shocks may affect central bank behaviour. In other words, there is always a positive probability that the current regime will end. Views about the nature of possible future regimes are likely to be influenced by observed past regimes.