Central Bank Credibility: An Historical and Quantitative Exploration

95 Pages Posted: 12 Jan 2015

See all articles by Michael D. Bordo

Michael D. Bordo

Rutgers University, New Brunswick - Department of Economics; National Bureau of Economic Research (NBER)

Pierre L. Siklos

Wilfrid Laurier University - School of Business & Economics; Balsillie school of international affairs

Date Written: January 2015

Abstract

In this paper we provide empirical measures of central bank credibility and augment these with historical narratives from eleven countries. To the extent we are able to apply reliable institutional information we can also indirectly assess their role in influencing the credibility of the monetary authority. We focus on measures of inflation expectations, the mean reversion properties of inflation, and indicators of exchange rate risk. In addition we place some emphasis on whether credibility is particularly vulnerable during financial crises, whether its evolution is a function of the type of crisis or its kind (i.e., currency, banking, sovereign debt crises). We find credibility changes over time are frequent and can be significant. Nevertheless, no robust empirical connection between the size of an economic shock (e.g., the Great Depression) and loss of credibility is found. Second, the frequency with which the world economy experiences economic and financial crises, institutional factors (i.e., the quality of governance) plays an important role in preventing a loss of credibility. Third, credibility shocks are dependent on the type of monetary policy regime in place. Finally, credibility is most affected by whether the shock can be associated with policy errors.

Suggested Citation

Bordo, Michael D. and Siklos, Pierre L., Central Bank Credibility: An Historical and Quantitative Exploration (January 2015). NBER Working Paper No. w20824. Available at SSRN: https://ssrn.com/abstract=2548344

Michael D. Bordo (Contact Author)

Rutgers University, New Brunswick - Department of Economics ( email )

New Brunswick, NJ
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Pierre L. Siklos

Wilfrid Laurier University - School of Business & Economics ( email )

Department of Economics
75 University Avenue W.
Waterloo, Ontario N2L 3C5
Canada
519-884-0710 Ext.. 3491 (Phone)

HOME PAGE: http://pierrelsiklos.com

Balsillie school of international affairs ( email )

67 Erb Street West
Waterloo, ON N2L 6C2
Canada

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