A MEASURE OF FEDERAL-RESERVE CREDIBILITY

We create two credibility variables, one depending on the correspondence between the Fed forecast of inflation and the private sector's forecast, the other between the Fed forecast and actual inflation. These are measures of credibility in terms of whether the public believes that the Fed will carry out its announced policy and whether the policy will have the effect claimed by the Fed. We find that credibility was surprisingly high in the late 1970s. The Fed's change in regime led to little change in credibility. The credibility variables help reduce the forecast errors of the Phillips curve in the early 1980s.