Central Bank Credibility and Monetary Policy
International Journal of Central Banking, Vol.19, No.2, June 2023
56 Pages Posted: 24 Dec 2018 Last revised: 3 Mar 2023
Date Written: December 24, 2018
In this paper, a numerical measure of central bank credibility is proposed that can be incorporated into a New Keynesian model under bounded rationality. This measure arises due to the existence of the changes in private beliefs, which are different from those of the central bank. It is shown that central bank credibility matters for macroeconomic stability. Specifically, as credibility increases, macroeconomic variables vary less since private agents’ expectations are more anchored. Through this channel, the model generates endogenous volatility changes. Finally, the credibility of the Federal Reserve and the European Central Bank are computed based on the proposed method.
Keywords: Monetary policy, Credibility, Learning, Bounded Rationality
JEL Classification: E3, E52, E58, D8
Suggested Citation: Suggested Citation