Edwin le Heron and Emmanuel Carre Since World War II, three monetary policy regimes have succeeded one another: the Keynesian regime until the mid-1970s, the monetarist regime until 1982; finally a New Consensus gradually forced itself upon central banking. Inside this New Consensus ‘inflation targeting’ became the prominent regime during the 1990s. This evolution was often explained through the debate rules versus discretion. This would thus give, first, discretion with Keynesianism, then rules with monetarism and the ‘New’ Classical Economy (NCE) and finally constrained discretion with the ‘New’ Keynesians. We shall develop the opposition of credibility versus confidence as a more relevant and enlightening way to understand this evolution. In particular, for the last 25 years, a period in the course of which expectations became an important channel in the explanation of inflation and in the implementation of the mon etary policy, we have been moving from a credibility strategy to a confidence strategy. By a strategy of credibility, we mean a Central Bank that adopts a model of behaviour and then follows it. It says what it does and does what it says. With monetarism and the NCE, the model of behaviour issues from the common knowledge of natural laws of economy. To respect these laws, the real model imposes a rule of behaviour to be followed by economic agents and the Central Bank. Then credibility is connected to respect for ‘truth’ (the natural laws). The simplified chain of the credibility strategy is R-C-C: Rule–Commitment–Credi bility. The...
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