ECB: Credibility at Risk?

Abstract

Credibility is an essential factor in the success of a central bank's monetary policy measures because individuals' decisions depend on expectations about the future (e.g., future inflation rates). A more credible central bank can influence expectations much better. Furthermore, an independent central bank is in need of some trust from the people due to its lack of direct democratic legitimacy. In order to fight the Great Recession and the Euro crisis the ECB took far-reaching measures which are (at least) on the fringes of its mandate. The article analyses whether the ECB's credibility and trust in this institution have suffered from its policy measures. To sum up, credibility—measured by inflation expectations—has not decreased in the aftermath of the financial crisis. However, there is a large decrease in trust in the ECB among European citizens. Lastly, the article discusses how credibility and trust could be strengthened.