Working Paper: NBER ID: w21710
Authors: Michael D. Bordo; Pierre L. Siklos
Abstract: A new measure of credibility is constructed as a function of the differential between observed inflation and some estimate of the inflation rate that the central bank targets. The target is assumed to be met flexibly. Credibility is calculated for a large group of both advanced and emerging countries from 1980 to 2014. Financial crises reduce central bank credibility and central banks with strong institutional feaures tend to do better when hit by a shock of the magnitude of the 2007-2008 financial crisis. The VIX, adopting an inflation target and central bank transparency, are the most reliable determinants of credibility. Similarly, real economic growth has a significant influence on central bank credibility even in inflation targeting economies.
Keywords: central bank credibility; inflation targeting; financial crises; institutional factors
JEL Codes: C31; E31; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| financial crises (G01) | central bank credibility (E58) |
| strong institutional features (P16) | central bank credibility (E58) |
| inflation target (E31) | central bank credibility (E58) |
| central bank transparency (E58) | central bank credibility (E58) |
| real economic growth (O49) | central bank credibility (E58) |