Working Paper: NBER ID: w20693
Authors: Michael Bordo; Pierre Siklos
Abstract: This paper examines the historical evolution of central bank credibility using both historical narrative and empirics for a group of 16 countries, both advanced and emerging. It shows how the evolution of credibility has gone through a pendulum where credibility was high under the classical gold standard before 1914 before being lost and not fully regained until the 1980s. This characterization does not, however, seem to apply to the monetary history in the emerging markets examined in the paper. Nevertheless, credibility in all the economies examined has been enhanced in recent decades thanks to the adoption of inflation targeting. However, the recent financial crisis and the call for central banks to focus more on financial stability relying on macro prudential regulation may pose significant challenges for central bank credibility.
Keywords: central bank credibility; inflation targeting; historical perspective
JEL Codes: C32; C36; E31; E58; N10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Credibility (D83) | Trust in institutions (O43) |
| Credibility (D83) | Economic outcomes (inflation expectations and monetary policy effectiveness) (E60) |
| Monetary regime (E42) | Central bank credibility (E58) |
| Behavior of policymakers (D78) | Central bank credibility (E58) |
| Historical context of central bank operations (E58) | Influence on credibility over time (C41) |
| Adoption of inflation targeting (E52) | Improved central bank credibility (E58) |