A Question of Credibility: a Short History of ECB Monetary Policy

Abstract

As noted in the previous chapter, credibility centres on whether and how central bankers can make credible commitments about their future conduct. Importantly, central bank independence and the credibility that flows from it needs to be understood in terms of actual policy and behaviour. It is one thing to proclaim a central bank independent — and, as we have demonstrated, the ECB maintains high levels of independence. It is another thing to proclaim the central bank’s policies credible. Monetary policy credibility must be measured over time and must be evaluated in terms of the monetary policies and behaviour of the bank. Moreover, the structure of the economy and internal politics may present the ECB with difficult tradeoffs between short-run policy benefits and long-run policy costs that may have an impact upon credibility. Such tradeoffs present the central bank with difficult policy choices that will be analysed in minute detail by politicians and markets alike. Such choices are the basis of evaluating central bank credibility.

Any monetary policy that lacks credibility must be paid for with higher interest rates. The expectations of a well-informed and fundamentally critical general public must not be disappointed. Central banks have to take this into account in pursuing their policy; above all, they should take care not to exacerbate any prevailing uncertainty through their own policy.

Otmar Issing, ECB Governing Council⁹⁶

Monetary policy is a matter of confidence. You don’t get confidence for nothing; you have to work and earn it. It’s a great effort for us at the Central Bank to explain why we are doing it. I believe we are more open, more transparent than any central bank in the world.

Wim Duisenberg, ECB Presidents⁹⁷