Central Bank Credibility Research Articles

Did interest rate guidance in emerging markets work?

Central banks in emerging market economies experimented with explicit interest rate guidance during 2020-2021. We explore the effectiveness of this policy. Despite some heterogeneity, interest rate guidance generally provided additional monetary stimulus, as reflected in lower medium-term yields and lower term spreads. The magnitude of the reduction in 10-year yields ranged between five and twenty basis points. In the immediate aftermath of the guidance, we do not observe a systematic negative market reaction – such as de-anchoring of inflation expectations, currency depreciation pressures, or increased sovereign credit risk – that would be associated with a loss of central bank credibility or with concerns about fiscal dominance.

Central Bank Credibility and Fiscal Responsibility

Central Bank Credibility and Fiscal Responsibility

Credibility of central banks in monetary economies

This paper develops a model of money to study interventions by a central bank that can monitor the money holdings of agents. I show that an off-the-equilibrium intervention enhances the use of money and stabilizes its values.

Stochastic credibility and optimal monetary policy

AbstractIn this paper, I study optimal monetary policy in a simple New Keynesian model with loose commitment and stochastic credibility. The loose commitment framework breaks the commitment‐discretion dichotomy in optimal monetary policy problems and allows for intermediate cases between commitment and discretion. Under this framework, the central bank is imperfectly credible, meaning that it occasionally reneges on promised policy plans. I contribute to the literature by introducing time‐variation in the central bank's credibility. I model credibility as an exogenous two‐state Markov chain and use a recursive saddlepoint functional equation to solve the model. I find that greater persistence and frequency of credibility losses increase welfare losses.

Is the Balance Sheet Expansions of the Central Banks Inadequate? The Case of Japan

The Bank of Japan has continued monetary expansion to combat deflation for over twenty years. However, in March 2024, the Bank raised the negative policy interest rate that had lasted eight years and two months. From now on, the Bank should cope with huge balance sheet expansion. Although yield curve control (YCC) has been abolished, long-term interest rates will continue to be controlled to some degree since the Bank will continue to purchase long-term government bonds. New purchases of exchange-traded funds (ETFs) have been completed, but the main measures of normalization, such as removing ETFs from the huge balance sheet, will not be implemented easily because of increasing risk of stock prices decreasing. Consequently, there will be some possibilities to lead to a rise in long-term interest rates, a strong yen (a decrease in exports), and also to a decline in stock prices. Empirical analyses are conducted to examine the effects of monetary expansion and the results are positive, however, this study emphasizes the importance of the credibility of central banks.

Herding behaviour and monetary policy: Evidence from the ZAR market

We investigated the presence of herding and its interactions with monetary policy in the ZAR market. We achieved this using both the standard herding tests and Sim and Zhou’s (2015) quantile-on-quantiles regressions. Similar to previous results in other markets, we found that extreme market events mainly drove herding behaviour in the ZAR market. This result was also significant in the presence of monetary policy announcements. However, herding in the ZAR markets was not related to market fads. It, therefore, was, in the main, a rational response to public information, indicating central bank credibility. This credibility gives scope to the central bank to improve communication in periods of market crisis to dampen potential volatility. Further studies on the herding of specific ZAR market participants can be invaluable.

Central Bank Credibility as A Determinant of Sovereign Risk Premium: Evidence from Turkey

Bu çalışmada Türkiye Cumhuriyet Merkez Bankası’nın (TCMB) kredibilitesinin Türkiye’nin CDS priminin bir belirleyicisi olup olmadığı Ocak 2008-Aralık 2022 dönemi için incelenmektedir. Çalışmanın bulguları Türkiye’nin CDS primi ile TCMB’nin kredibilitesi arasında uzun dönemli bir ilişki olduğunu göstermektedir. Merkez bankası kredibilitesinde meydana gelen artış CDS primini düşürürken; döviz kurunun değişim oranında ve enflasyon oranında meydana gelen artışlar ise CDS primini yükseltmektedir. Ayrıca hata düzeltme terimi, CDS primindeki bir sapmanın uzun dönem denge değerine hızla uyarlandığını göstermektedir. Dolayısıyla merkez bankasının enflasyon beklentilerini yönetmedeki başarısının ülke risk primini düşürmesi, para politikasının kurumsal çerçevesinin bağımsızlık, şeffaflık ve hesap verebilirlik ilkeleriyle iyileştirilmesini bir politika önerisi olarak ortaya koymaktadır.

How credible is average and symmetric inflation targeting in an episode of high inflation?

This article examines the risks and societal costs associated with flexible average inflation targeting in the United States and symmetric inflation targeting in the Eurozone. Employing an empirical approach, we analyze monthly cumulative inflation gaps over a monetary policy horizon of 36 months. By investigating the trajectories of the cumulative inflation gaps, we find a heavy tailed distribution and a 20 percent probability of over- and undershooting the inflation target. We exhibit that the offsetting mechanism introduced in the revised monetary strategies lack credibility in ensuring price stability during a period of persistent inflation. Consequently, the credibility of central banks may be compromised. The policy implications are the integration of an escape clause and prompt monetary corrections in cases where the inflation goal is not achieved. This study provides insights for policymakers and central banks, emphasizing challenges in maintaining credibility and price stability within the new monetary strategies.

COMMUNICATION OF THE CENTRAL BANK AS A DETERMINANT OF THE CREDIBILITY AND EFFECTIVENESS OF THE MONETARY POLICY ON THE EXAMPLE OF THE EUROPEAN CENTRAL BANK

The aim of the undertaken research is an attempt to explain, on theoretical and empirical grounds, the interdependence between central bank communication, its transparency credibility and,consequently, the effectiveness of monetary policy pursued by central banks. The study used research methods based on the literature analysis on the subject in the field of banking and finance, as well as statistical and econometric methods (Granger causality analysis and the generalised linear model – GLM). Literature studies are aimed at answering the question of what is the relationship between the transparency, credibility of the central bank and the effectiveness of monetary policy in theoretical terms. However, the empirical research studies aim to confirm the hypothesis (H0) or reject the hypothesis (H1) about the causal relationships between the variables mentioned. Empirical analyses were conducted on the example of the European Central Bank, which, from the point of view of its monetary policy, is characterised by relatively high efficiency, relatively effectively stabilising inflation in the monetary union. All statistics used in the study were taken from databases of the International Monetary Fund (IMF World Economic Outlook), the European Union statistical office (Eurostat) and the Organisation for Economic Cooperation and Development (OECD) (OECD Data). The analysis covers the period from 2010 to 2022 based on monthly data. The results of the research confirmed the existence of the null hypothesis (i.e., the significant impact of communication, transparency and credibility of the European Central Bank on the effectiveness of monetary policy in the Euro area). The results of the conducted research may be a starting point for further, more in-depth research on the relationship between communication, transparency, credibility and effectiveness of central banks in countries with different levels of economic development.

Anchoring Inflation Expectations in Selected Asian Countries: The Role of Monetary Policy Credibility

Inflation targeting has become a widespread monetary policy framework in many developing countries, and this approach to achieving its goals depends on the level of trust in the central bank. As the central bank's credibility grows, it gains a greater ability to shape the public's expectations regarding inflation. The public adjusts their expectations about future inflation based on the central bank's declared targets. Still, this adjustment depends on their belief in the central bank's capacity to achieve those objectives. Credibility plays a crucial role in disconnecting these expectations from past trends, enabling them to be formed in a forward-looking manner. This study aims to examine the credibility of monetary policy and inflation in the case of selected South Asian countries like Pakistan, India, Sri Lanka, and Bangladesh. The quarterly data are used from 1990Q1 to 2021Q4, but it little bit varies from country to country. The Credibility Index (CI) is used to measure the credibility of monetary policy. The Quantile Regression (QR) is employed to test the impact of monetary policy credibility on inflation. The results indicate that all the variables are stationary at the same level and have dynamic correlations across quartiles and countries. The results from the regression analysis show that the credibility of monetary policy has a negative impact on the inflation rate. This research enhances the understanding of the vital link between credibility and monetary policy effectiveness in developing economies.

The effect of central bank credibility on economic growth and output volatility in inflation targeting regime

The effect of central bank credibility on economic growth and output volatility in inflation targeting regime

Does central bank credibility from professional forecasters and consumers affect the interest rate and its expectations?

PurposeThis paper aims to contribute to the analysis concerning how inflation forecasts from different economic agents (professional forecasters and consumers) lead to varying levels of central bank credibility and how it affects the monetary policy interest rate and its expectations.Design/methodology/approachBased on the Brazilian economy data from June 2007 to May 2022, the authors provide evidence that is useful for search mechanisms that improve the conduct of monetary policy through the management of inflation expectations. The authors perform several ordinary least squares and generalized method of moments regressions inspired by the Taylor rule principle. In brief, the benchmark model considers that the monetary policy interest rate and its expectations respond to departures of inflation expectations to the target (a proxy for central bank credibility) and the level of economic activity.FindingsThe main result of the analysis is that inflation expectations from professional forecasters and consumers imply different perceptions of central bank credibility that affect the monetary policy interest rate and expectations for horizons until one year ahead.Originality/valueThe novelty that the authors bring from the analysis is that the authors calculate central bank credibility by taking into account the “public beliefs” of different economic agents. Furthermore, the authors analyze the effect of central bank credibility from professional forecasters and consumers on the monetary policy interest rate and its expectations.

Central Bank Credibility’s Effect on Stock Exchange Returns’ Volatility: Evidence from OECD Countries

Central bank characteristics are important determinants of stock market returns and their volatility. While the literature has examined the effects of transparency and independence, no research has been conducted so far on the effect of central bank credibility on stock market returns’ volatility. A panel regression using financial and macroeconomic data from 45 OECD member countries over the period of 1998–2022 tested the hypothesis that central bank credibility determines stock exchange returns’ volatility. The results indicated that credibility reduces stock returns’ volatility, remaining robust and statistically significant across models. Economic growth also decreases stock market volatility, while money-market interest rates’ volatility, the stock market’s turnover ratio, and economic/financial crises act as amplifying factors of stock market volatility. All variables, except for economic growth, exhibit unidirectional causality, leading to changes in stock market volatility.

Living Up to Expectations: Central Bank Credibility, the Effectiveness of Forward Guidance, and Inflation Dynamics Post-Global Financial Crisis

Living Up to Expectations: Central Bank Credibility, the Effectiveness of Forward Guidance, and Inflation Dynamics Post-Global Financial Crisis

What is the effect of imported inflation and central bank credibility on the poor and rich?

ABSTRACT This study analyzes two phenomena regarding the inflation of the poor and rich. Firstly, considering that imported inflation is a source of inflation, we investigate whether the harmful effect of imported inflation is higher for the poor than the rich. Secondly, assuming that central bank credibility helps keep inflation under control and that the poor are more susceptible to the damaging effect of the inflation tax, we evaluate whether the credibility is more beneficial to the poor. Based on data from the Brazilian economy, the findings indicate a higher effect of imported inflation on food inflation and poor households. In contrast, central bank credibility effectively reduces inflation for the poor.

Living Up to Expectations: Central Bank Credibility, the Effectiveness of Forward Guidance, and Inflation Dynamics Post-Global Financial Crisis

Living Up to Expectations: Central Bank Credibility, the Effectiveness of Forward Guidance, and Inflation Dynamics Post-Global Financial Crisis

Central Bank Credibility and Fiscal Responsibility

Central Bank Credibility and Fiscal Responsibility

Interpreting Monetary Policy Surprises: Does Central Bank Credibility Matter?

Interpreting Monetary Policy Surprises: Does Central Bank Credibility Matter?

Central bank credibility during COVID-19: Evidence from Japan

Japanese realized and expected inflation has been below the Bank of Japan’s two percent target for many years. We examine the impact of announcements of expansionary monetary and fiscal policy under COVID-19 on inflation expectations from an arbitrage-free term structure model of nominal and real yields. We find that both types of policies failed to lift inflation expectations, which instead declined notably over the pandemic period and are projected to only slowly revert back to Bank of Japan target levels. Our results therefore illustrate the challenges faced in raising well-anchored low inflation expectations.

Can central bank credibility promote a substitution effect in the monetary transmission mechanism?

ABSTRACT We analysed whether the credibility of the Central Bank of Brazil (CBB) influences the substitution effect between the interest channel and the inflation expectations channel. Specifically, based on a DSGE model, we investigate the effects of central bank credibility on key domestic macroeconomic variables. The results show that higher central bank credibility reduces the harmful effect of fighting inflation on domestic macroeconomic variables.