The Central Bank's endogenous and non-linear credibility in a dynamic stochastic general equilibrium model: theory and a small computational simulation

Abstract

A recent literature has analysed the Central Bank's credibility nature and determinants. In general, a Central Bank with higher credibility can implement a more efficient monetary policy, which is expressed through lower social costs in terms of volatility of relevant variables, such as output and inflation. This work aims at presenting some important features of that literature by proposing a dynamic stochastic general equilibrium model in which the monetary policy's credibility has endogenous and non–linear dynamics and its degree is important in determining the economic system performance. These elements are illustrated by a small computational experiment.