So even a relatively small effect of this sort can have a material impact on the credibility, and therefore the power, of the guidance (the dotted line in Chart 5). The solid blue line presumes that there’s some mechanism – some Odyssean mast to which you could tie yourself – ensuring that the cost of breaking the promise is always greater than the temptation to do so. Chart 5. Commitment policy loses much of its power if it isn’t fully credible  Results from a simulation of a small macroeconomic model under alternative assumptions about monetary policy and the average distance to the lower bound. Macroeconomic volatility is measured using a simple “loss function” that weights the variance of inflation and the output gap. The y-axis shows the square root of the loss function, scaled to 1 for the case of commitment policy with an average distance to the lower bound of 5pp. Sources: See Appendix for further details. In practice, it’s hard to see that there is one. The importance of maintaining reputation obviously helps. There’s a cost to breaking one’s word. But that mightn’t be enough, especially if your promise seeks to constrain not just your future self but your successor as well. That obstacle is all the greater if, as in the UK, policy decisions are made not by collective consensus but by democratic vote. Each member of the MPC member is individually accountable for his or her vote. It’s part of the UK’s constitution that “no parliament can bind its successor”[16].
William C Dudley: Economics at the Federal Reserve banks Remarks by Mr William C Dudley, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the American Economic Association 2014 Annual Meeting, Philadelphia, Pennsylvania, 4 January 2014. *  *  *  It is a pleasure to be here today and to have the opportunity to talk about the role of economics and economists at the Reserve Banks. Economics is a critical discipline at the New York Fed, just as it is at the Board of Governors and the other Reserve Banks. Nevertheless, I expect that my perspective will differ a bit from that of Eric, Charlie, or Narayana.1 In part, this is because my background is different. Although I have a Ph.D. from Berkeley, unlike Charlie and Narayana, I never spent time in academia, and, unlike Eric, I spent most of my career not in public service, but working in the private sector. My focus during my time in the private sector was also somewhat different than my colleagues, with an emphasis on those issues that affect financial markets. Don’t get me wrong, I am very happy I got a Ph.D. in economics, the training has been invaluable. It’s just that my career path is a bit unusual relative to other central bankers, so that must influence my perspective. Of course, another important point of differentiation is where I am now and the unique role that the New York Fed performs within the Federal Reserve System.