The question is of course how to define central bank credibility. Perhaps even more importantly, there is evidence that the importance of this principle seems to be. We are all familiar with the much publicised reforms to the reserve bank of new zealand. It turns out, however, that the basic results can be developed from some standard statistical operations with weighted regression.
The myth of central bank independence mercatus center. In spite of this ample academic evidence of the role of good policy and central bank independence in achieving price stability, we must face the fact that the particular contribution of monetary credibility, as contrasted with the contribution of central bank policies themselves, is. The issue of central bank independence has generated considerable debate all over the world in recent years. Theory and evidence the mit press cukierman, alex on. Filled with applications and carefully worked out technical detail, it provides a valuable comprehensive analysis of central bank. Central bank independence and macroeconomic performance. Central bank credibility and the expectations channel. A monetary strategy is credible if the public believes that the government will actually carry out its stated. After we have distinguished between independence and conservativeness, the literature on optimal inflation contracts is discussed, followed by research in which the inflationary bias is endogenised. Perhaps even more importantly, there is evidence that the importance of this principle seems to be increasingly well understood by society at large. This book brings together a large body of cukiermans. The principal reasons that they do this are twofold. There is considerable evidence that inflation targeting improves central bank credibility over non inflation targeting monetary policy strategies that focus on maintaining low inflation walsh 2009. Nergiz dincera and barry eichengreenb ated university, ankara, turkey buniversity of california, berkeley this paper reports updated measures of transparency and independence for more than 100 central banks.
Some comparative evidence thedegree of central bank independence varies con siderably across countries. The empirical evidence shows a negative correlation between inflation and central bank independence, especially in oecd countries, but the effects on growth are less conclusive. The statistical evidence is fundamentally flawed for a number of reasons, which this paper will discuss. Theory and evidence the mit press paperback january 1, 2003 by alex cukierman author visit amazons alex cukierman page. Alex cukierman, in central bank strategies, credibility and independence. The evidence suggests that communication can be an important and powerful part of the central bank s toolkit since it has the ability to move financial markets, to enhance the predictability of monetary policy decisions, and potentially to help achieve central banks macroeconomic objectives. While this new index addresses the main limitations of the existing indicators, it also appears particularly. In a word, credibility matters in theory, and it is certainly believed to matter in practicealthough empirical evidence on this point is hard to come by because credibility is not easy. This article investigates the relationship between central bank credibility and the volatility of the key monetary policy instrument. Thus, when the monetary policy pursued by the central bank is credible, shockinduced. Cukierman, a 1992, central bank strategy, credibility, and independence. Central bank independence and disinflationary credibility. The uncertain future of central bank independence vox, cepr.
Political independence is taken to depend on the institutional relationship between the central bank and the executive, the procedure to nominate. Introduction credibility theory provides tools to deal with the randomness of data that is used for predicting future events or costs. This book brings together a large body of cukiermans research and integrates it with recent developments in the political economy of monetary policy. Central bank strategy, credibility, and independence mit. Indeed, the principle of central bank independence in the pursuit of the goals of monetary policy has been codified in the legal systems of many countries. Financial dollarization and central bank credibility. Central bank strategy, credibility, and independence. Article pdf available in journal of economic surveys 151. It is fair to say that the bulk of the evidence suggests that central bank independence produces lower inflation at no real costs. Theory and evidence the mit press, cambridge, ma, 1992, attempts to uncover and analyze the reasons for positive inflation and positive rates of monetary expansion p. Our definition of credibility is, in effect, a quality assessment exercise, and reputation, that is, the ability of a central bank to deliver the promised monetary policy outcome over time, seems consistent. In a comment to my previous post on qe and ngdp targeting joseph ward argues that the federal reserve has relatively solid central bank credibility. Fraser, to the 20th seanza central banking course, karachi, 23 november 1994.
Theory and evidence the mit press alex cukierman on. Defining central bank independence and accountability when considering independence, we follow fischers4. The evidence, he reports, suggests a robust negative relationship between inflation and growth. Cesar serra provided outstanding research assistance. Granting central banks independence from shortterm political control is widely assumed to decrease inflation by increasing the credibility of commitments to price stability. Ringuede, laboratoire deconomie dorleans, france 4th research conference addressing structural rigidities in view of monetary. The evidence suggests that communication can be an important and powerful part of the central banks toolkit since it has the ability to move financial markets, to enhance the predictability of monetary policy decisions, and potentially to help achieve central banks macroeconomic objectives. This quotation perfectly sums up the complex issues surrounding the concept of central bank credibility. Credibility and monetary policy patrick perrier and robert amano, research department according to economic theory, a highly credible monetary policy helps to reduce the degree of uncertainty surrounding the objectives of monetary policy.
Central bank strategy, credibility, and independence mit press. Nov 03, 2005 in spite of this ample academic evidence of the role of good policy and central bank independence in achieving price stability, we must face the fact that the particular contribution of monetary credibility, as contrasted with the contribution of central bank policies themselves, is difficult to measure. Determinants of central bank independence and governance. Several authors including bade and parkin 1982, ale sina 1988, 1989, and grilli. The role of the central bank, mexico city, november 1415, 2005 contemporaneous conventional wisdom is that a su. Evolution and effectiveness prepared by christopher crowe and ellen e. Centralbank credibility, reputation and inflation targeting. To do this we extend a stochastic general equilibrium model. European journal of political european journal of political economy economy vol. Central bank strategy, credibility, and independence the. Defining central bank credibility in a comment to my previous post on qe and ngdp targeting joseph ward argues that the federal reserve has relatively solid central bank credibility. Mourmouras a,, douming su b a queen mary and westfiem college, university of london, mile end road, london e1 4ns, uk b university of southampton, southampton, uk accepted for. To me a central bank is credible if the markets and the.
A revisit of the relation between central bank independence and inflation hsinyi lin department of economics, national chengchi university, taipei 116, taiwan, r. Central bank strategies, credibility, and independence. Commitment of monetary policy with uncertain central bank preferences, csef working papers 117, centre for studies in economics and finance csef, university of naples. Journal of central banking theory and practice, 2018, 3, pp. A few basics of credibility theory actuaries institute. First, we propose a timevarying measure of central bank credibility based on the gap between inflation expectations and the official inflation target. Our definition of credibility is, in effect, a quality assessment exercise, and reputation, that is, the ability of a central bank to deliver the promised. Alex cukierman this book brings together a large bod of. Political culture and the political economy of central. Central bank credibility, independence, and monetary. Several authors including bade and parkin 1982, ale sina 1988, 1989, and grilli, masciandaro, and tabellini 1991 found that more. Legal independence is one, but certainly not the sole, determinants of central bank independence. For example, an insurance company uses past loss information of an insured or group of insureds to estimate the cost to provide future insurance.
A revisit of the relation between central bank independence. Find all the books, read about the author, and more. February 7 2006 lecture prepared for the international conference on. Jan 01, 2003 central bank strategy, credibility, and independence mit press. The analytics central banks around the world jealously guard their credibility as inflationfighters, and seek as hard as they can to acquire a reputation for consistency in following lowinflation policies. An update of theory and evidence article pdf available in journal of economic surveys 151. A political agency theory of central bank independence.
Central bank strategy, credibility, and independence the mit press. First, central banking looks rather different in practice than it does in theory. Central bank strategy, credibility, and independence book. Theory and evidence, mit press books, the mit press, edition 1, volume 1, number. Second, both theory and practice could benefit from greater contact with and deeper understanding 2.
The role of the central bank, mexico city, november. Evidence based on a new credibility index yannick lucotte esg management school, france with g. The uncertain future of central bank independence vox. Credibility theory for dummies gary g venter guy carpenter instrat least squares credibility is usually derived from some fairly compficated looking assumptions about risk across a collective. This quotation perfectly sums up the complex issues. Financial dollarization and central bank credibility kevin cowant quytoan do we thank without implicating guillermo calvo, olivier jeanne, aart kraay, ugo panizza, and sergio schmukler for helpful comments on an earlier version of this paper. Defining central bank credibility the market monetarist. Dec 12, 2014 inflation targeting as a credibility enhancing policy strategy. Using the same criteria as bade and parkin, alesina 1988 adds four more countries. This paper analyzes public and privatesector behavior in a sample of seventeen oecd countries for evidence of variations in disinflationary credibility with monetary. The issue of central bank independence has been the subject of important academic work. Meade1 authorized for distribution by atish ghosh may 2008 abstract this working paper should not be reported as representing the views of the imf. Alex cukierman is well known for his work on central bank behavior.
534 708 583 1192 610 230 1008 383 95 700 1090 641 976 1375 761 1562 726 530 22 216 521 568 168 1409 291 863 953 1044 427 82 462 448 681 68 382 876