Central Bank Credibility in Inflation-Targeting (IT) Economies: Do Domestic Institutions Matter?

Author

Faculty of Economics, University of Mazandaran, Babolsar, Iran

Abstract

This paper examines the main political determinants of central bank credibility (CBC) from 1990 to 2014. Covering 25 inflation targeting (IT) economies, I mainly focus on institutional factors since adopting the IT framework. As the CBC is highly concentrated in the right tail of the distribution, the mean-based approaches are an incomplete description of CBC reaction when the parameters are not uniform over the conditional distribution of the credibility. In departing from the problem, I use a Quantile Regression approach, providing superior information on the political determinants nexus across various parts of the credibility distribution. I find institutional determinants are prominent and significant at the lower quantiles. This evidence could be attributed to the less sensitivity of the private sector’s expectations to the institutional characteristics.

Keywords