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The extent to which policy announcements are believed. Policy announcements by monetary or fiscal authorities are credible if it is rational for people to believe that the authorities will in fact cany out their announced policies. Thus, if the authorities have no incentive to deviate from the announced policies in the future, these policies are credible. When there is an incentive to deviate, credibility may be achieved if the authorities have a sufficiently long reputation, or history of holding to their promises. See also reputational policy.


Reference: Oxford Press Dictonary of Economics, 5th edt.