Central Bank Credibility Before and After the Crisis
Author | : Michael D. Bordo |
Publisher | : |
Total Pages | : 39 |
Release | : 2015 |
ISBN-10 | : OCLC:930275385 |
ISBN-13 | : |
Rating | : 4/5 (85 Downloads) |
Book excerpt: 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 determinants 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 common determinants of credibility. Similarly, real economic growth has a significant influence on central bank credibility even in inflation targeting economies. Hence, responding to real economic factors is necessarily detrimental to central bank credibility. Nevertheless, caution is in order about whether monetary authorities should take on broader responsibilities for the financial performance of economies.