An Implicit Credibility Index for the Central Banks that Implemented Inflation-Targeting Regime

Nezir Köse () and Ali Talih Süt ()
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Nezir Köse: Istanbul Beykent University, Department of Economics, Istanbul, Türkiye
Ali Talih Süt: Istanbul Beykent University, Department of Economics, Istanbul, Türkiye

Journal of Central Banking Theory and Practice, 2025, vol. 14, issue 2, 63-90

Abstract: This study proposes an implicit index for central bank credibility, which is critical in developing countries implementing an inflation-targeting regime. In a credible central bank, the policy rate impacts the interest rate on short-term deposits. Under this assumption, the residuals obtained from the panel regression model, in which deposit rates are defined as dependent and policy rates as independent variables, are used to calculate the implicit credibility index of central banks. The proposed central bank implicit credibility index was calculated using monthly data from 12 developing countries and New Zealand implementing the inflation targeting regime between January 2006 and June 2023. According to average implicit credibility scores, the most credible central banks for the period between 2006 and 2023 are Thailand, South Africa, and New Zealand, respectively. The results of the fixed effects model using the annual data of the 13 countries between 2006 and 2022 indicate that inflation and its uncertainties have negative effects on the implicit credibility index of the central bank. These results indicate that central banks in developing countries with high inflation and inflation uncertainty may have difficulty in ensuring credibility.

Keywords: Emerging economies; central bank credibility; inflation targeting; panel data. (search for similar items in EconPapers)
JEL-codes: C23 E31 E52 E58 (search for similar items in EconPapers)
Date: 2025
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