Assessing the Credibility of Inflation-Targeting Central Banks

Motilal Bicchal ()
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Motilal Bicchal: P.O. Central University, University of Hyderabad

A chapter in Studies in International Economics and Finance, 2022, pp 73-96 from Springer

Abstract: Abstract This paper creates an asymmetric credibility indicator to measure the credibility of inflation-targeting central banks. The proposed indicator is computed for a sample of eight representative central banks using the inflation expectations survey data of professional forecasters and observed inflation data. The computed indicators are then used in the panel models to explore the credibility effect for central banks of emerging and advanced economies. The finding suggests that the presence of credibility makes significant changes in the constituents of inflation expectations. It makes the elements of backward-looking expectations insignificant and considerably increases the relative weight of the inflation target in the expectations formation. Further, the findings show that despite positive inflation shock in the global financial crisis, the inflation expectations were found well anchored. These findings have important policy implications for the conduct of monetary policy that credible inflation-targeting central banks can anchor forecasters’ inflation expectations in the crisis period such as COVID-19 crisis.

Keywords: Inflation targeting; Central bank credibility; Monetary policy; Inflation expectations (search for similar items in EconPapers)
JEL-codes: E31 E42 E52 E58 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:spr:isbchp:978-981-16-7062-6_5

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DOI: 10.1007/978-981-16-7062-6_5

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