Institutional Design and Credibility

Jyotsana Kala () and Naveen Srinivasan
Additional contact information
Jyotsana Kala: JPMorgan Chase and Co.

Working Papers from Madras School of Economics,Chennai,India

Abstract: The optimal design of a monetary institution to achieve policy effectiveness has been of utmost importance to policy-makers. This paper presents an empirical analysis of the link between the structure of a monetary institution and inflation persistence in an economy. It is well established in literature that governance structure of a monetary institution affects the stability of an economy. But the mechanism by which it operates remains unclear. In this paper, we claim this mechanism to be the credibility of the monetary institution. A Central Bank with an autonomous and transparent governance structure is deemed to be more credible by agents, which in turn leads to higher inflation stability in the economy. We investigate this hypothesis using data for the UK. Our results suggest that credibility is the missing link. The institutional design of the Central Bank contributes to its credibility, which subsequently affects the degree of inflation persistence in the economy.

Keywords: Divisia,central bank; central bank independence; inflation persistence; monetary policy credibility; policy making; time-inconsistency (search for similar items in EconPapers)
JEL-codes: C32 E31 E52 E58 E61 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2020-06
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:

Downloads: (external link)
https://www.mse.ac.in/wp-content/uploads/2021/05/Working-paper-193.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:mad:wpaper:2020-193

Access Statistics for this paper

More papers in Working Papers from Madras School of Economics,Chennai,India Contact information at EDIRC.
Bibliographic data for series maintained by Geetha G ().