There is little disagreement that credibility is crucial to successful monetary policy. Numerous attempts in the literature have tried to define it, explain why it is necessary to have it and how it can be earned and maintained. Institutional commitment to a nominal anchor (Mishkin, 2007), or any explicit form of commitment more generally, (Albanesi et al, 2003 and Christiano and Gust, 2000), are often thought to promote price stability and are considered crucial to the successful management of inflation expectations. Commitment, in general, is the key ingredient to establishing credibility, and more so in the most recent theory on optimal monetary policy, referred to as the new-neoclassical (or new-Keynesian) synthesis (Clarida, Gali, and Gertler, 1999; Woodford, 2003). Empirically, a number of studies have shown the beneficial effects of a successful commitment to a nominal anchor, in terms of more stable and less persistent inflation (Levin et al 2004, Gürkaynak et al 2006) but also in terms of lower volatility of output fluctuations (Fatás et al 2007; Mishkin and Schmidt-Hebbel, 2002, 2007). Commitment to a well defined and credible nominal anchor has thus an effect on the dynamic relationship between inflation expectations and realized inflation. As such, a fully credible and transparent monetary policy provides an anchor for inflation expectations, and therefore de-couples them from short run inflation dynamics (Demertzis and Viegi, 2007).
    Using this intuition, the purpose of this paper is two-fold: first, we propose a method for assessing the extent to which expectations are de-coupled from inflation. Hence, we identify a means for checking empirically whether expectations are anchored in the long run, and at what level. In this respect, the extent of anchoring will serve as a proxy for credibility. Second, to be able to assess how capable this measure is of identifying credibility correctly, we need to cross-check it against periods for which the level of credibility is known and generally agreed upon. To this end, we apply the measure to the US inflation history since 1963, which includes both the period of the Great Inflation, in which credibility was known to have been poor and deteriorating, as well as the period of the Great Moderation during which credibility in the monetary authority was gradually re-established. Of particular interest is the evolution of credibility during the early eighties, associated with Volcker's Disinflation, in which monetary policy makers worried explicitly about the way that `inflationary psychology' was affecting their ability to be effective (Goodfriend and King 2005). Aiming to align these expectations with their own inflation objectives as well as effectively bring inflation down, the Fed engaged in persistently aggressive policies. This was done at great costs to output in that period, but helped reverse the inflationary trend thereafter, and hence improve credibility, (Goodfriend 1993, 2007).