Central Bank Credibility and Monetary Policy

74 Pages Posted: 24 Dec 2018

See all articles by Kwangyong Park

Kwangyong Park

Economist, Economic Research Institute, The Bank of Korea

Date Written: December 24, 2018

Abstract

A numerical measure of central bank credibility, which can be incorporated into a New Keynesian model under bounded rationality, is proposed and analyzed. This measure arises mainly due to the existence of the drifts in private long-term predictions, which are different from those of the central bank. It is shown that central bank credibility matters for macroeconomic stability. As the credibility increases, macroeconomic variables vary less. This generates endogenous volatility changes. Lastly, the magnitude of response of inflation to monetary policy depends on the level of credibility. This suggests that ignoring credibility changes might leads to overestimate of the cost of disinflation.

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). Bank of Korea WP 2018-45. 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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