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

See all articles by Kwangyong Park

Kwangyong Park

Economist, Economic Research Institute, The Bank of Korea

Date Written: December 24, 2018

Abstract

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

Park, Kwangyong, Central Bank Credibility and Monetary Policy (December 24, 2018). International Journal of Central Banking, Vol.19, No.2, June 2023, Available at SSRN: https://ssrn.com/abstract=3306035 or http://dx.doi.org/10.2139/ssrn.3306035

Kwangyong Park (Contact Author)

Economist, Economic Research Institute, The Bank of Korea ( email )

110, 3-Ga, Namdaemunno, Jung-Gu
Seoul 100-794
Korea, Republic of (South Korea)

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