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Revisiting Svensson's test of inflation target credibility

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  • Alexander Kupfer

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.

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  • Alexander Kupfer, 2015. "Revisiting Svensson's test of inflation target credibility," Applied Economics Letters, Taylor & Francis Journals, vol. 22(5), pages 343-348, March.
    • Handle: RePEc:taf:apeclt:v:22:y:2015:i:5:p:343-348
    DOI: 10.1080/13504851.2014.943876
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    References listed on IDEAS

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    Cited by:

    1. Mark K. Armah, 2024. "The effect of central bank credibility on economic growth and output volatility in inflation targeting regime," Journal of Social and Economic Development, Springer;Institute for Social and Economic Change, vol. 26(2), pages 619-640, August.
    2. 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.
    3. Bicchal, Motilal, 2022. "Central bank credibility and its effect on stabilization," Economic Analysis and Policy, Elsevier, vol. 76(C), pages 73-94.

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