Revisiting Svensson's test of inflation target credibility

Alexander Kupfer

Applied Economics Letters, 2015, vol. 22, issue 5, 343-348

Abstract: I revisit Svensson's (1993) test of inflation target credibility by applying it to the European Central Bank (ECB)'s credibility regarding the maintenance of price stability. By selecting seven European bond pairs, each consisting of an inflation-linked and nominal bond, I show that Svensson's test is applicable during relatively calm times but does not work properly during the recent financial and sovereign debt crisis. Risk premia and flight-to-liquidity effects bias yields of both bond types and hamper a meaningful analysis during this time. However, in line with existing literature, the ECB's credibility can be confirmed during calm financial times.

Date: 2015
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DOI: 10.1080/13504851.2014.943876

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