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

Author

Listed:
  • Grégory Levieuge

    (Banque de France, DGEI-DEMFI-RECFIN (041-1391)
    Univ. Orléans)

  • Yannick Lucotte

    (Univ. Orléans
    PSB Paris School of Business)

  • Sébastien Ringuedé

    (Univ. Orléans)

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.

Suggested Citation

  • Grégory Levieuge & Yannick Lucotte & Sébastien Ringuedé, 2018. "Central bank credibility and the expectations channel: evidence based on a new credibility index," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 154(3), pages 493-535, August.
    • Handle: RePEc:spr:weltar:v:154:y:2018:i:3:d:10.1007_s10290-018-0308-6
    DOI: 10.1007/s10290-018-0308-6
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    More about this item

    Keywords

    Credibility; Inflation expectations; Inflation targeting; Emerging countries; EGARCH;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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