Policy Seminar on the Federal Reserve Credibility and Reputation in Historical Perspective

Tuesday, January 20, 2015
George Shultz Conference Room, Herbert Hoover Memorial Building
Michael Bordo, Michael Boskin, Russell Boyer, John Cochrane, Darrell Duffie, Bob Hall, Doug Irwin, Em Kapur, Pete Klenow, Stephen Langlois, David Mauler, Allan Meltzer, Ken Scott, Alp Simsek, John Taylor

Michael Bordo, Distinguished Visiting Fellow at Hoover and Professor of Economics and Director of the Center for Monetary and Financial History at Rutgers University, discussed his recent work on “Federal Reserve Credibility and Reputation in Historical Perspective.”

Bordo began by mentioning how, broadly speaking, central banks’ credibility has exhibited pendulum-like behavior over the past 150 years, being high under the gold standard, low in much of the twentieth century, and then remarkably high during the two decades preceding the crisis of 2007-2008. He argued that the challenge in coming years will be preventing a swing back the other direction.
Bordo defined central bank credibility as a commitment to follow well-articulated and transparent rules and goals. In recent joint work with Pierre Siklos, he chooses a more formal interpretation and uses inflation performance as a measure of credibility. Using this measure, Bordo explained how a close link exists between central bank credibility and monetary regimes. Specifically, he compared credibility across three broadly defined regimes: the gold standard, the
Bretton Woods system, and the recent fiat money regime with low inflation targeting. These were associated with high, low, and high credibility, respectively. Bordo then reviewed a timeline of historical developments in the evolution of central bank credibility in the US and abroad. He presented a result illustrating how inflation-targeting by central banks is associated with greater credibility and transparency, as well as lower inflation.
Concluding his talk, Bordo laid out several policy implications. He described how the recent financial crisis has forced central banks to focus on financial stability, compromising their independence. Bordo emphasized the danger of calls for central banks to elevate financial
stability to the same level as macro stability by heading off credit cycles with preemptive monetary policy. He cited Sweden and Norway as recent examples. He argued that extra policy levers in central banks complicate their mission, and that macro prudential regulation may pose significant challenges for central banks to preserve credibility. Such policies may be helpful, but ought to be delegated to fiscal authorities and other agencies.