Evolution of Federal Reserve Credibility

The questions that are addressed are: Did the October 1979 change in Fed policy lead to a change in credibility? And if credibility did change in 1979, what was the impact of the 1982 policy change on its value? The evolution of Federal Reserve policy across time is examined. A theoretical proxy for monetary policy is discussed and the empirical methodology used by Karamouzis and Lombra (1989) for estimating the proxy is explained. An overview of the relationship between varying Federal Reserve credibility and varying monetary policy is given. An empirical proxy for Federal Reserve credibility that is more general and complete than the Hardouvelis and Barnhart (1989) model is offered. A short summary and conclusions that may be drawn from the study are presented.