Central Bank Reputation and Inflation-Unemployment Performance: Empirical Evidence from an Executive Survey of 62 Countries

66 Pages Posted: 29 May 2018

Date Written: May 29, 2018

Abstract

Although there is a well-established theoretical literature that links central bank (CB) reputation with inflation performance following Barro and Gordon, there is little empirical work testing the relationship rigorously. This paper empirically tests the impact of reputation on inflation-unemployment performance using a novel set of data on CB reputation - an annual local business manager survey on central bank policy covering 62 countries during 1995-2016. This paper finds that CB reputation is a significant determinant of inflation: the results of an FE panel and Arellano-Bond difference GMM model show that high-reputation CBs have achieved better inflation performances over the past 20 years with lower levels of inflation than others, holding the output gap and unemployment rate constant. This result remains robust to various control variables including money growth, past inflation levels, exchange rates, and financial crisis dummies. This paper also finds that high CB reputation is associated with a tight anchoring of inflation expectations to inflation targets in inflation-targeting countries. The effects of reputation on the volatility of inflation and unemployment rates are found to be not robust. This paper offers evidence of the opposite-direction causality as well that goes from high inflation to decreased CB reputation.

Keywords: Reputation, Credibility, Monetary policy, Anchoring of inflation expectation

JEL Classification: E31, E52, E58, N10

Suggested Citation

Hwang, In Do, Central Bank Reputation and Inflation-Unemployment Performance: Empirical Evidence from an Executive Survey of 62 Countries (May 29, 2018). Bank of Korea WP 2018-14. Available at SSRN: https://ssrn.com/abstract=3186281 or http://dx.doi.org/10.2139/ssrn.3186281

In Do Hwang (Contact Author)

The Bank of Korea ( email )

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