Central bank credibility and the expectations channel: evidence based on a new credibility index

Grégory Levieuge, Yannick Lucotte and Sébastien Ringuedé
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Sébastien Ringuedé: Univ. Orléans

Review of World Economics (Weltwirtschaftliches Archiv), 2018, vol. 154, issue 3, No 3, 493-535

Abstract: Abstract This article investigates the relationship between central bank credibility and the volatility of the key monetary policy instrument. First, we propose a time-varying measure of central bank credibility based on the gap between inflation expectations and the official inflation target. While this new index addresses the main limitations of the existing indicators, it also appears particularly suited to assess the monetary experiences of a large sample of inflation-targeting emerging countries. Second, by means of EGARCH estimations, we formally prove the existence of a negative effect of credibility on the volatility of the short-term interest rate. In line with the expectations channel of monetary policy, the higher the credibility of the central bank, the lower the need to move its instruments to effectively fulfill its objective.

Keywords: Credibility; Inflation expectations; Inflation targeting; Emerging countries; EGARCH (search for similar items in EconPapers)
JEL-codes: E43 E52 E58 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (25)

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Working Paper: Central bank credibility and the expectations channel: Evidence based on a new credibility index (2015)
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DOI: 10.1007/s10290-018-0308-6

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