Abstract
Abstract Most emerging market central banks have adopted inflation targeting as their monetary policy system. The heart of inflation targeting system is inflation expectations. The success of a central bank in achieving targets depends on to the extent to which inflation expectations are formed by the announced targets. As the credibility of the central bank increases, its ability to affect the public expectation also increases. The public adjusts its inflation expectations based on announced inflation target only in case of that they believe that the central bank has the sufficiency to reach the inflation target. Credibility enables expectation to be formed in a forward-looking way by weakening its connection with the past. This study aims to contribute to the literature concerning the effects of credibility on monetary policy. For this purpose, using data of six emerging inflation targeting economies (Turkey, Brazil, the Czech Republic, Chile, Poland, and South Africa), the empirical tests were carried out in order to understand the effect of the credibility on the behaviour of inflation expectation in emerging economies. The findings denote that credibility is quite relevant to reduce inflation expectations and contributes to the strength of inflation targets being an anchor for inflation expectations.
Highlights
This article provides a perspective on the anchoring effect of monetary policy credibility based on economic theory and empirical evaluation
The evidence obtained enables us to monitor whether the central bank may succeed in bringing inflation expectations closer to inflation targets by building its credibility
This study addresses the effect of monetary policy credibility on inflation expectations and the anchoring ability of inflation targets by using data of six inflationtargeting emerging countries (Turkey, Poland, Brazil, the Czech Republic, South Africa, and Chile)
Summary
This article provides a perspective on the anchoring effect of monetary policy credibility based on economic theory and empirical evaluation. Central banks are able to overcome the problem of lack of confidence and strengthen their credibility under inflation targeting by announcing a strong commitment to the target and implementing monetary policy in accordance with its target (Aguir, 2018). In this system, a central bank estimates a numerical "target" or "target range" for inflation over a specific horizon and announces it to the public, makes a strong commitment to attempt directing actual inflation toward target inflation. Building credibility makes easier for the central bank to manage economic agents’ inflation expectations
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