Good afternoon. It’s always a pleasure to speak to the members of NABE, and I very much appreciate the invitation to participate in this year’s Economic Policy Conference. My remarks today will focus on the issue of credibility—in particular on the Federal Reserve’s credibility regarding its announced commitment to maintaining price stability. I will discuss ways in which the Federal Reserve could improve transparency and communication, enhancing Fed credibility and the effectiveness of monetary policy. To my mind, credibility is a worthy end in itself—those who are credible are often said to be “as good as their word. ” But credibility is not only virtuous; it is also useful. I will argue that one of its most important benefits is shaping public expectations about inflation, and in particular, “anchoring ” those expectations to price stability. As a consequence, credibility enhances the effectiveness of monetary policy which, in turn, serves a second “worthy end”, namely, maximizing the nation’s economic well-being. To give you a brief overview of the argument, the idea is that, with credibility, the Fed and the public work together toward the same goals. When this happens, one often hears the phrase “the markets do all the work of monetary policy, ” meaning that market participant
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