Is the Impact of High Monetary Policy Credibility on Consumer Price Inflation and the ERPT Reinforced by Fiscal Policy Credibility?

Abstract

Evidence shows that the exchange rate appreciation, inflation and inflation expectations decline are larger due to persistently rising fiscal policy and monetary policy credibility shocks compared to the non-persistent shocks. In addition, we establish that strong fiscal policy credibility reinforces the effects of monetary policy credibility shocks leading to a larger exchange rate appreciation, larger declines in inflation outcomes and inflation expectations. Thus, we conclude that strong fiscal policy credibility reinforces the monetary policy credibility effects on the exchange rate, inflation outcomes and inflation expectations in achieving the price stability mandate. Thus, the persistence of monetary policy credibility shock matters for the exchange rate, inflation outcomes and inflation expectations.