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

Document Type : Research Paper

Author

Faculty of Economics and Administrative Sciences, University of Mazandaran, Babolsar, Iran

Abstract

This paper examines the main institutional determinants of central bank credibility (CBC) from 1990 to 2014. 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 institutional determinants nexus across various parts of the credibility distribution. Covering 25 inflation targeting economies, 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. Central bankers, aiming to stabilize the economy, credibility growth, or target inflation, could reduce public expectations by taking into account the non-linear impact of institutional factors on their credibility.

Keywords

Main Subjects

References

Alesina, A., & Passalacqua, A. (2016). The Political Economy of Government Debt. Handbook of Macroeconomics, 2, 2599-2651.
Aluko, M. A., & Akinola, G. O. (2004). Globalization and the Manufacturing Sector: A Study of  Some Selected Textiles Firms in Nigeria. Journal of Social Science, 9(2), 122-127.
Alesina, A., & Summers, L. H. (1993). Central Bank Independence and Macroeconomic Performances: Some Comparative Evidence. Journal of Money, Credit, and Banking, 25, 151-62.
Amato, J. D., & Gerlach, S. (2002). Inflation Targeting in Emerging Market and Transition Economies: Lessons after a Decade. European Economic Review, 46, 781-790.
Bade, R., & Parkin, M. (1985). Central Bank Laws and Monetary Policy. Retrieved from University of Western Ontario, Mimeo.
Barro, R. T., & Gordon, D. B. (1983). Rules, Discretion and Reputation in a Model of Monetary Policy. Journal of Monetary Economics, 12, 101-121.
Beck, T., Clarke, G., Groff, A., Keefer, P., & Walsh, P. (2001). New Tools in Comparative Political Economy: the Database of Political Institutions. World Bank Economic Review, 15, 165-176.
Beck, T., Demirguc-Kunt, A., & Levine, R. (2003). Law, Endowments, and Finance. Journal of Financial Economics, 70(2), 137-181.
Beetsma, R., Debrun, X., Fang, X., Kim, Y., Duarte Lledo, V., Mbaye, S., & Zhang, X. (2019). Independent Fiscal Councils: Recent Trends and Performance. European Journal of Political Economy, 57, 53-69.
Beetsma, R., & Sloof , R. (2022). The Political Economy of Fiscal Transparency and Independent Fiscal Councils. European Economic Review, 145, 104-118.
Bernanke, B. S. (2010). Central Bank Independence, Transparency, and Accountability. Monetary and Economic Studies International Conference, Retrieved from https://ritholtz.com/2010/05/central-bank-independence-transparency-and-accountability/
Blinder, A., Ehrmann, M., De Haan, J., & Jansen, D. (2017). Necessity as the Mother of Invention: Monetary Policy After the Crisis. Economic Policy, 32(92), 707-755.
Blinder, A. (2000). Central-Bank Credibility: Why do We Care? How do We Build it? American Economic Review, 90(5), 1421–1431.
---------- (1998). Central Banking in Theory and Practice. London: MIT Press.
Bodea, C., & Hicks, R .(2015). Price Stability and Central Bank Independence: Discipline, Redibility, and Democratic Institutions. International Organization, 69(1), 35-61.
Bodea, C., & Higashijima, M. (2017). Central Bank Independence and Fiscal Policy: Can the Central Bank Restrain Deficit Spending? British Journal of Political Science, 47(1), 47-70.
Bomfim, A., & Rudebusch, G. (2000). Opportunistic and Deliberate Disinflation under Imperfect Credibility. Journal of Money, Credit, and Banking, 32(4), 707–721.
Burkovskaya, A. (2019). Political Economy Behind Central Bank Independence. Journal of Macroeconomics, 34, 1-15.
Cameron., A. C., & Trivedi, P. K. (2005). Microeconometrics: Methods and Applications. New York: Cambridge University Press.
Chevapatrakul, T. (2015). Monetary Environments and Stock Returns: International Evidence on the Quantile Regression Technique. International Review of Financial Analysis, 38, 83-108.
Christelis, D., Georgarakos, D., Jappelli, T., & Van, R. M. (2020). Trust in the Central Bank and Inflation Expectation. SSRN, Retrieved from https://ssrn.com/abstract=3540974
Cukierman, A. (2013). Monetary Policy and Institutions Before, during, and after the Global Financial Crisis. Journal of Financial Stability, 9(3), 373-384.
---------- (1992). Central Bank Strategy, Credibility, and Independence. Cambridge, MA: MIT Press.
Cukierman, A., & Meltzer, A. (1986). A Theory of Ambiguity, Credibility and Inflation under Discretion and Asymmetric Information. Econometrica, 54(5), 1099–1128.
Cukierman, A., Webb, S. B., & Neyapti, B. (1992). Measuring the Independence of Central Banks and its Effects on Policy Outcomes. The World Bank Economic Review, 6, 353–398.
Darabi, K. D., & Samimi A. J. (2016). Central Bank Independence and Central Bank Conservatism: Theory with an Application to Iran. Journal of Money and Economy, 11(1), 15-30.
De Haan, J., & Eijffinger, S. (2016). The Politics of Central Bank Independence. De Nederlandsche Bank Working Paper, 539, 1-28.
De Mendonca, H. (2007). Towards Credibility from Inflation Targeting: The Brazilian Experience. Applied Economics, 39(20), 2599-2615.
Debrun, X., & Jonung, L. (2019). Under Threat: Rules-Based Fiscal Policy and How to Preserve it. European Journal of Political Economy, 57, 142-157.
Drazen, A. (2002). Fiscal Rules From A Political Economy Perspective. TelAviv University, University of Maryland, NBER, and CEPR, Retrieved from https://econweb.umd.edu/~drazen/PE%20of%20Fiscal%20Rules62002.pdf
Dreher, A., Sturm, J. E., & De Haan, J. (2008). Does High Inflation Cause Central Bankers Lose their Job? Evidence Based on a New Dataset. European Journal of Political Economy, 24, 778-787.
Dreher, A., Sturm, J., & De Haan, J. (2010). When Is a Central Bank Governor Replaced? Evidence Based on a New Data Set. Journal of Macroeconomics, 32(3), 766-781.
Eijffinger, S., & Hoeberichts, M. (2008). The Trade- off between Central Bank Independence and Conservativeness in a New Keynesian Framework. European Journal of Political Economy, 24, 742-747.
---------- (1998). The Trade Off between Central Bank Independence and Conservativeness. Oxford Economic Papers, 50(3), 397-411.
Eijffinger, S., & De Haan, J. (1996). The Political Economy of Central Bank Independence. Special Papers in International Economics, 19, 1-92.
Farvaque, E. (2002). Political Determinants of Central Bank Independence. Economics Letters, 77(1), 131-135.
Fernandez-Albertos, J. (2015). The Politics of Central Bank Independence. Annual Review of Political Science, 18, 217-237.
Franzese, R. J. (1999). Partially Independent Central Banks, Politically Responsive Governments, and Inflation. American Journal of Political Science, 43(3), 681-706.
Friedman, M. (1962). Should There Be an Independent Monetary Authority? Cambridge, MA: Harvard University Press.
Gali, J., & Monacelli, T. (2005). Monetary Policy and Exchange Rate Volatility in a Small Open Economy. Review of Economic Studies, 72(3), 707-734.
Goodman, J. (1991). The Politics of Central Bank Independence. Comparative Politics, 23(3), 329-349.
Grilli, V., Masciandaro, D., & Tabellini, G. (1991). Political and Monetary Institutions and Public Financial Policies in the Industrial Countries. Economic Policy, 13, 341-392.
Hallerberg M. (2002). Introduction: Fiscal Policy in the European Union. European Union Politics, 3(2), 24-46.
Hefeker, C., & Zimmer, B. (2011). The Optimal Choice of Central Bank Independence and Conservatism under Uncertainty. Journal of Macroeconomics, 33(4), 595-606.
Kamal, E., & Taghinejadomran, V. (2021). Fiscal Determinants of Central Bank Credibility: Evidence on Inflation-Targeting Economies. Iranian Journal of Economic Studies, 10(2), 441-472.
Keefer, P., & Stasavage, D. (2003). The Limits pf Delegation: Veto Players, Central Bank Independence and the Credibility of Monetary Policy. American Political Science Review, 97, 407-423.
---------- (2002). Checks and Balances, Private Information, and the Credibility of Monetary Commitments. International Organization, 56(4), 751-774.
Keynes, J. M. (1982). Activities 1931-1939: World Crises and Policies in Britain and America. London: Macmillan.
---------- (1971). The Treatise on Money 2: The Applied Theory of Money. London: Macmillan.
Koenker, R., & Bassett, G. W. (1978). Regression quantiles. Econometrica, 46(1), 33–50.
Koenker, R., & Hallock, F. K. (2001). Quantile Regression. Journal of Economic Perspectives, 15(4), 143–156.
Kopits, G., & Symansky, S. (1998). Fiscal Policy Rules. Washington, DC: International Monetary Fund.
Kydland, F. E., & Prescott, E. C. (1977). Rules Rather than Discretion: The Inconsistency of Optimal Plans. Journal of Political Economy, 85, 473-492.
Leeper, E. M. (1991). Equilibrium under Active and Passive Monetary and Fiscal Policies. Journal of Monetary Economics, 27, 129-147.
Levieuge, G., Lucotte, Y., & Ringuedé, S. (2018). Central Bank Credibility and The Expectations Channel: Evidence Based on a New Credibility Index. Review of World Economics, 154, 493-535.
Lucotte, Y. (2009). The Choice of Adopting Inflation Targeting in Emerging Economies: Do Domestic Institutions Matter? HAL, 00539713, 1-33.
Masciandaro, D. (2021). Central Bank Governance in Monetary Policy Economics (1981-2020). BAFFI CAREFIN Centre Research Paper, 2021-153, 1-48.
Milesi-Ferretti, G. M. (2004). Good, Bad or Ugly? on the Effects of Fiscal Rules with Creative Accounting. Journal of Public Economics, 12(88), 377-394.
Mishkin, F. S. (2011). Monetary Policy Strategy: Lessons from the Crisis. NBER Working Paper, 16755, 1-20.
Moser, P. (1999). Checks and Balances, and the Supply of Central Bank Independence. European Economic Review, 43(8), 1569–1593.
Nalepa, M., & Xue, J. (2018). Can the Number of Veto Players Measure Policy Stability? Retrieved from https://www.semanticscholar.or
Neuenkirch, M., & Tillmann, P. (2014). Inflation Targeting, Credibility, and Non-Linear Taylor Rules. Journal of International Money and Finance, 41, 30–45.
Pistoresi, B., Salsano, F., & Ferrari, D. (2011). Political Institutions and Central Bank Independence Revisited. Applied Economics Letters, 18, 679–82.
Rivot, S. (2013). Keynes and Friedman on Laissez-Faire and Planning: Where to Draw the Line? (1st Ed.). Oxfordshire: Routledge.
Sargent T., & Wallace, N. (1981). Some Unpleasant Monetarist Arithmetic. Federal Reserve Bank of Minneapolis Quarterly Review, 5(3), 1-17.
Schuknecht, L. (2004). EU Fiscal Rules Issues and Lessons from Political Economy. Working Papers Series, 2004(421), 1-20.
Siklos, P. (2008). No single Definition of Central Bank Independence is Right for All Countries. European Journal of Political Economy, 24, 802-816.
Strong, C., & Yayi, C. (2021). Central Bank Independence, Fiscal Deficits and Currency Union: Lessons from Africa. Journal of Macroeconomics, 68, 45-66.
Iranian Economic Review
Volume 27, Issue 4
December 2023
Pages 1495-1519

Files

Share

How to cite

Statistics