Conquering Credibility for Monetary Policy under Sticky Confidence

Abstract

We derive a best-reply monetary policy when the confidence by price setters on the monetary authority's commitment to price level targeting is both incomplete and sticky. We find that complete confidence (or full credibility) is not a necessary condition for reaching a price level target. In fact, it is the reaching of a price level target for long enough that rather ensures the conquering of the greatest possible confidence. Evidently, this result has relevant implications for the conduct of monetary policy in pursuit of price stability.