Box 1.The Role of Credibility in Central Bank Monetary Policy Action

Monetary policy plays a fundamental role in the pursuit of economic stability and its effectiveness is closely linked to its credibility.In the context of monetary policy, credibility refers to the degree of confidence that economic agents have that the central bank will achieve its objectives of price stability, support for sustained economic growth, and contribution to financial stability while acting consistently and transparently.Credibility is, therefore, a key ingredient for the success of monetary policy since it influences agents' expectations about the future path of inflation.A transparent and credible monetary policy facilitates predictable decision-making by economic agents.In Colombia, where an inflation targeting regime is in place, the achievement of the inflation target depends to a large extent on the public's confidence in Banco de la Repblica's commitment to the inflation target.Greater credibility allows the central bank to achieve its price stability objective more easily while lower credibility implies higher economic and social costs associated with the implementation of monetary policy.High credibility in monetary policy and in the central bank contributes to a stable economic environment and makes it easier for the public to plan future decisions.As Blinder (2000) points out, the monetary authority is credible when people are confident that it will do what it says it will do.In this Box, the concept of credibility in monetary policy, its determinants and its macroeconomic effects are analyzed.The trends of credibility in Colombia are also briefly analyzed.