A number of studies have related interpersonal and institutional trust to lower transaction costs, social cohesion and wellbeing. Second, trust is a livelier concept, which can respond to information and experience acquired by stakeholders, as compared to the more static notion of credibility. Trust is not an abstract concept, but an attitude developed by actual people based on their beliefs, information and actual experiences. Third, by focusing on stakeholders, trust can help institutions to pay closer attention to their environment, changes in social values and standards, thus reinforcing their end beneficiaries rather than structures or procedures. This may be especially important for technocratic and independent organizations, like central banks, that may tend to isolate themselves despite mandates in the general interest. Finally, as we will see below, recent work shows that trust can be deconstructed into a series of components that can be linked to institutional actions. This may provide a stronger lead to how trust can be protected, built, or eroded. In what remains, I will argue that public trust is the cornerstone for safeguarding central bank independence as a stable outcome of the way modern societies decide to allocate powers across institutions.3 A central bank that is not trusted is vulnerable to political pressure to deviate from its mandate, regardless of whether it is formally independent or not. It is therefore crucial for modern central banks to understand better the concept of trust, the mechanisms for fostering and maintaining it, and to think about strategies and tools for the management of public trust.

In the real world, central bank independence relies on the willingness of key stakeholders–most notably governments and legislatures—to play by the rules and by the ability of central banks to gain legitimacy and credibility from stakeholders. Independence does not automatically guarantee credibility either. Being free from political interference from politicians does not make a central bank infallible nor free from undue influence from other actors. Credibility needs to be protected and cultivated amid social, political and technological change. Page 2 of 8  Central Bank of Chile July 2019  In a recent piece, the IMF illustrates the importance of central bank credibility (IMF, 2018). It shows that central banks can better accommodate shocks with smaller output loss and social cost the more anchored are inflation expectations to the policy target, with lower pass-through from the exchange rate to consumer prices and lower persistence of inflation. More generally, public policies should be more effective the more credible the institutions in charge of them, as it helps aligning the behavior of the public to the policy objectives pursued. This is surely more important for independent institutions that cannot rely of a broader set of incentives and controls to shape the behavior of their stakeholders. A key question then is how to build credibility. This is an issue only partly addressed by Economics. The rational expectations school would suggest adopting a clear-cut policy rule, communicating it openly and clearly, and ensuring strict compliance, to exploit the learning capacities from economic agents.