Central Bank Credibility and Monetary Policy

Kwangyong Park

No 2018-45, Working Papers from Economic Research Institute, Bank of Korea

Abstract: A numerical measure of central bank credibility, which can be incorporated into a New Keynesian model under bounded rationality, is proposed and analyzed. This measure arises mainly due to the existence of the drifts in private long-term predictions, which are different from those of the central bank. It is shown that central bank credibility matters for macroeconomic stability. As the credibility increases, macroeconomic variables vary less. This generates endogenous volatility changes. Lastly, the magnitude of response of inflation to monetary policy depends on the level of credibility. This suggests that ignoring credibility changes might leads to overestimate of the cost of disinflation.

Keywords: Monetary policy; Credibility; Learning; Bounded Rationality (search for similar items in EconPapers)
JEL-codes: D8 E3 E52 E58 (search for similar items in EconPapers)
Pages: 74 pages
Date: 2018-12-24
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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http://papers.bok.or.kr/RePEc_attach/wpaper/english/wp-2018-45.pdf Working Paper, 2018 (application/pdf)

Related works:
Journal Article: Central Bank Credibility and Monetary Policy (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:bok:wpaper:1845

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