reputational policy

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A policy which relies on other people believing the policy-maker's promises. For example, it is possible to attempt to control inflation by cutting the money supply immediately, or by promising to cut it steadily over some future period. The policy of promising a gradual cut in the money supply can only work if people believe the future cuts will actually be made: that is, the authorities' promises must be credible. If their past conduct has led people to regard official promises as worthless, a reputational policy is not available, and inflation can be controlled, if at all, only by immediate cuts in the money supply, possibly at a severe cost in unemployment. Reputational policies are only made possible by building up a reputation for keeping one's word, even in circumstances when immediate pain could be avoided by breaking it. See also credibility.

Subjects: Economics.

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