Working Paper: NBER ID: w20824
Authors: Michael D. Bordo; Pierre L. Siklos
Abstract: In this paper we provide empirical measures of central bank credibility and augment these with historical narratives from eleven countries. To the extent we are able to apply reliable institutional information we can also indirectly assess their role in influencing the credibility of the monetary authority. We focus on measures of inflation expectations, the mean reversion properties of inflation, and indicators of exchange rate risk. In addition we place some emphasis on whether credibility is particularly vulnerable during financial crises, whether its evolution is a function of the type of crisis or its kind (i.e., currency, banking, sovereign debt crises). We find credibility changes over time are frequent and can be significant. Nevertheless, no robust empirical connection between the size of an economic shock (e.g., the Great Depression) and loss of credibility is found. Second, the frequency with which the world economy experiences economic and financial crises, institutional factors (i.e., the quality of governance) plays an important role in preventing a loss of credibility. Third, credibility shocks are dependent on the type of monetary policy regime in place. Finally, credibility is most affected by whether the shock can be associated with policy errors.
Keywords: central bank credibility; inflation expectations; financial crises; monetary policy
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 |
|---|---|
| Changes in central bank credibility (E52) | Financial crises (G01) |
| Policy errors (I18) | Credibility loss (F65) |
| Governance quality (H11) | Reputational loss (G33) |
| Monetary policy regime (E63) | Credibility (D83) |
| Historical events (N94) | Credibility (D83) |
| Financial crises (G01) | Credibility (D83) |