Credibility of Economic Policy

The people are watching policy-makers.

An important recent development in both the theory and practice of macroeconomic policy has been a focus on policy credibility. From a theoretical perspective, new analyses recognize that government policy-making responds to incentives and constrains. Thus the structure of government incentives and constrains affect policy choices. Experience has also shown that similar policies can produce different outcomes, depending on the extent to which economic agents believe that the given policy will be sustained. Thus recognizing economic agents likely assessment of a proposed policy has become an important issue for policy makers.

This Learning Module will introduce you to the issue of economic policy credibility. Using a simple formal model, you can see how differences in public beliefs can cause the same policy action to produce different outcomes. For an analytical framework to evaluate public beliefs, examine six concepts relating to the credibility of economic policy. For real world experience, there are case summaries for you to consider.

You should learn from this module that public perceptions of economic policy are crucial to policy-making. The World Wide Web provides a unique medium for collecting and sharing perceptions about economic policy credibility. You can participate in this process by analyzing our policy scenarios and then considering how others have responded to them. Policy credibility is a subtle and complex issue, and no analysis or survey can provide a definite solution to a particular credibility question. The most important objective of this Learning Module is simply to emphasize the importance of policy makers considering what others will think.

  1. Learning Objectives
    1. Recognize that public perceptions of economic policy affect policy outcomes.
    2. Analyze some policy scenarios.
      1. Tariff Liberalization
      2. State Procurement Reform
      3. Central Bank Statistics
      4. Adopting a New Policy Model
      5. Regional Development Initiative
      6. Legalizing private importers
    3. Understand concepts that affect public perceptions of announced policies.
      1. Target compatibility
      2. Time consistency
      3. Availability of information
      4. Reputation
      5. Openness to world markets
      6. Institutional structure
    4. Study some cases from world experience.
      1. Argentina's Convertibility Program
      2. A Decree Encouraging Private Investment in Bolivia
      3. Financial Control and Inflation in China
      4. New Zealand's Macroeconomic Principles
      5. Reform and the Law in Russia
      6. Policy Reversal in Zambia, 1985-1987
  2. Review questions
  3. Questions for further research and analysis
  4. References for further study

Go to Topics in Economic Policy

Go to GalbiThink Communications Policy home page.