IDEAS home Printed from https://ideas.repec.org/a/cbk/journl/v7y2018i3p91-110.html
   My bibliography  Save this article

Central Bank Credibility, Independence, and Monetary Policy

Author

Listed:
  • Abdelkader Aguir

    (Lorraine University, BETA Lab UMR 7522 University of Lorraine and UR MOFID UR 13-ES60, Metz, France)

Abstract

The main motives behind the adoption of an inflation targeting regime largely relate to the notion of credibility, transparency of monetary policy and the autonomy of the central bank, which explicitly undertakes to achieve a certain inflation target. This paper examines the effects of inflation targeting in emerging economies in relation to the degree of independence of the central bank and the credibility of monetary policy. We find effects in emerging economies with little central bank independence, so our findings suggest that the central bank’s credibility, transparency and independence is a prerequisite for emerging economies to experience a decline in inflation following the adoption of inflation targeting.

Suggested Citation

  • Abdelkader Aguir, 2018. "Central Bank Credibility, Independence, and Monetary Policy," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 7(3), pages 91-110.
    • Handle: RePEc:cbk:journl:v:7:y:2018:i:3:p:91-110
    as

    Download full text from publisher

    File URL: http://www.cbcg.me/repec/cbk/journl/vol7no3-6.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Geraats, Petra M., 2000. "Why Adopt Transparency? The Publication of Central Bank Forecasts," Center for International and Development Economics Research, Working Paper Series qt0hw7h7cp, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
    2. Zied Ftiti, 2009. "The Macroeconomic Performance of the Inflation Targeting Policy: An Approach Based on the Evolutionary Co-spectral Analysis," Working Papers 0918, Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon.
    3. Martin, Fernando M., 2015. "Debt, inflation and central bank independence," European Economic Review, Elsevier, vol. 79(C), pages 129-150.
    4. Mr. Scott Roger & Mr. Mark R. Stone, 2005. "On Target? the International Experience with Achieving Inflation Targets," IMF Working Papers 2005/163, International Monetary Fund.
    5. Aizenman, Joshua & Hutchison, Michael & Noy, Ilan, 2011. "Inflation Targeting and Real Exchange Rates in Emerging Markets," World Development, Elsevier, vol. 39(5), pages 712-724, May.
    6. Frederic S. Mishkin, 2011. "Monetary Policy Strategy: Lessons from the Crisis," NBER Working Papers 16755, National Bureau of Economic Research, Inc.
    7. Ghosh, Atish R. & Ostry, Jonathan D. & Chamon, Marcos, 2016. "Two targets, two instruments: Monetary and exchange rate policies in emerging market economies," Journal of International Money and Finance, Elsevier, vol. 60(C), pages 172-196.
    8. Abdelkader Aguir & Mounir Smida, 2015. "Efficiency of monetary policy under inflation targeting," Economics Bulletin, AccessEcon, vol. 35(1), pages 788-813.
    9. Amato, Jeffery D. & Gerlach, Stefan, 2002. "Inflation targeting in emerging market and transition economies: Lessons after a decade," European Economic Review, Elsevier, vol. 46(4-5), pages 781-790, May.
    10. Mukherjee, Bumba & Singer, David Andrew, 2008. "Monetary Institutions, Partisanship, and Inflation Targeting," International Organization, Cambridge University Press, vol. 62(2), pages 323-358, April.
    11. Mr. Mohsin S. Khan, 2003. "Current Issues in the Design and Conduct of Monetary Policy," IMF Working Papers 2003/056, International Monetary Fund.
    12. Svensson, Lars E. O., 1997. "Inflation forecast targeting: Implementing and monitoring inflation targets," European Economic Review, Elsevier, vol. 41(6), pages 1111-1146, June.
    13. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
    14. Zied Ftiti, 2010. "The Effect of the Inflation Targeting Policy: an Approach Based on the Evolutionary Spectral Analysis," Post-Print halshs-00492916, HAL.
    15. de Mendonça, Helder Ferreira & de Guimarães e Souza, Gustavo José, 2012. "Is inflation targeting a good remedy to control inflation?," Journal of Development Economics, Elsevier, vol. 98(2), pages 178-191.
    16. Frederic S. Miskin & Klaus Schmidt-Hebbel, 2007. "Does Inflation Targeting Make a Difference?," Central Banking, Analysis, and Economic Policies Book Series, in: Frederic S. Miskin & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Se (ed.),Monetary Policy under Inflation Targeting, edition 1, volume 11, chapter 9, pages 291-372, Central Bank of Chile.
    17. Carare, Alina & Stone, Mark R., 2006. "Inflation targeting regimes," European Economic Review, Elsevier, vol. 50(5), pages 1297-1315, July.
    18. Carsten Hefeker & Blandine Zimmer, 2010. "Central bank independence and conservatism under uncertainty: Substitutes or complements?," Volkswirtschaftliche Diskussionsbeiträge 140-10, Universität Siegen, Fakultät Wirtschaftswissenschaften, Wirtschaftsinformatik und Wirtschaftsrecht.
    19. Lucotte, Yannick, 2012. "Adoption of inflation targeting and tax revenue performance in emerging market economies: An empirical investigation," Economic Systems, Elsevier, vol. 36(4), pages 609-628.
    20. Thomas J. Sargent & Neil Wallace, 1984. "Some Unpleasant Monetarist Arithmetic," Palgrave Macmillan Books, in: Brian Griffiths & Geoffrey E. Wood (ed.), Monetarism in the United Kingdom, pages 15-41, Palgrave Macmillan.
    21. Siklos, Pierre L. & Abel, Istvan, 2002. "Is Hungary ready for inflation targeting?," Economic Systems, Elsevier, vol. 26(4), pages 309-333, December.
    22. Catao, Luis A.V. & Terrones, Marco E., 2005. "Fiscal deficits and inflation," Journal of Monetary Economics, Elsevier, vol. 52(3), pages 529-554, April.
    23. Nicoletta Batini & Douglas Laxton, 2007. "Under What Conditions Can Inflation Targeting Be Adopted? The Experience of Emerging Markets," Central Banking, Analysis, and Economic Policies Book Series, in: Frederic S. Miskin & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Se (ed.),Monetary Policy under Inflation Targeting, edition 1, volume 11, chapter 12, pages 467-506, Central Bank of Chile.
    24. Grégory Levieuge, 2002. "Banques centrales et prix d'actifs : une étude empirique," Revue Française d'Économie, Programme National Persée, vol. 16(4), pages 25-59.
    25. Gabriel Caldas Montes & Julio Cesar Albuquerque Bastos, 2014. "Effects of reputation and credibility on monetary policy: theory and evidence for Brazil," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 41(3), pages 387-404, May.
    26. Dawit Senbet, 2016. "Measuring the Channels of Monetary Policy Transmission: A Factor-Augmented Vector Autoregressive (Favar) Approach," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 5(2), pages 5-40.
    27. Mr. Mark Zelmer & Ms. Andrea Schaechter, 2000. "Adopting Inflation Targeting: Practical Issues for Emerging Market Countries," IMF Occasional Papers 2000/017, International Monetary Fund.
    28. Frederic S. Mishkin, 2004. "Why the Federal Reserve Should Adopt Inflation Targeting," International Finance, Wiley Blackwell, vol. 7(1), pages 117-127, March.
    29. Charléty, Patricia & Romelli, Davide & Santacreu-Vasut, Estefania, 2017. "Appointments to central bank boards: Does gender matter?," Economics Letters, Elsevier, vol. 155(C), pages 59-61.
    30. Ghosh, Amit, 2017. "How does banking sector globalization affect economic growth?," International Review of Economics & Finance, Elsevier, vol. 48(C), pages 83-97.
    31. de Mendonça, Helder Ferreira & Tiberto, Bruno Pires, 2017. "Effect of credibility and exchange rate pass-through on inflation: An assessment for developing countries," International Review of Economics & Finance, Elsevier, vol. 50(C), pages 196-244.
    32. Helder Ferreira de Mendonca & Rubens Teixeira da Silva, 2009. "Fiscal effect from inflation targeting: the Brazilian experience," Applied Economics, Taylor & Francis Journals, vol. 41(7), pages 885-897.
    33. Im, Kyung So & Pesaran, M. Hashem & Shin, Yongcheol, 2003. "Testing for unit roots in heterogeneous panels," Journal of Econometrics, Elsevier, vol. 115(1), pages 53-74, July.
    34. Goncalves, Carlos Eduardo S. & Salles, Joao M., 2008. "Inflation targeting in emerging economies: What do the data say?," Journal of Development Economics, Elsevier, vol. 85(1-2), pages 312-318, February.
    35. Montes, Gabriel Caldas, 2013. "Credibility and monetary transmission channels under inflation targeting: An econometric analysis from a developing country," Economic Modelling, Elsevier, vol. 30(C), pages 670-684.
    36. Ftiti, Zied & Aguir, Abdelkader & Smida, Mounir, 2017. "Time-inconsistency and expansionary business cycle theories: What does matter for the central bank independence–inflation relationship?," Economic Modelling, Elsevier, vol. 67(C), pages 215-227.
    37. Shu Lin & Haichun Ye, 2012. "What to Target? Inflation or Exchange Rate," Southern Economic Journal, John Wiley & Sons, vol. 78(4), pages 1202-1221, April.
    38. Keith Blackburn & Alessandra Pelloni, 2005. "Growth, cycles, and stabilization policy," Oxford Economic Papers, Oxford University Press, vol. 57(2), pages 262-282, April.
    39. Ben S. Bernanke & Frederic S. Mishkin, 1997. "Inflation Targeting: A New Framework for Monetary Policy?," Journal of Economic Perspectives, American Economic Association, vol. 11(2), pages 97-116, Spring.
    40. Laurence M. Ball & Niamh Sheridan, 2004. "Does Inflation Targeting Matter?," NBER Chapters, in: The Inflation-Targeting Debate, pages 249-276, National Bureau of Economic Research, Inc.
    41. G. S. Maddala & Shaowen Wu, 1999. "A Comparative Study of Unit Root Tests with Panel Data and a New Simple Test," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(S1), pages 631-652, November.
    42. Alpanda, Sami & Honig, Adam, 2010. "Political monetary cycles and a de facto ranking of central bank independence," Journal of International Money and Finance, Elsevier, vol. 29(6), pages 1003-1023, October.
    43. Alpanda, Sami & Honig, Adam, 2014. "The impact of central bank independence on the performance of inflation targeting regimes," Journal of International Money and Finance, Elsevier, vol. 44(C), pages 118-135.
    44. Athanasios Orphanides, 2001. "Monetary Policy Rules Based on Real-Time Data," American Economic Review, American Economic Association, vol. 91(4), pages 964-985, September.
    45. Hefeker, Carsten & Zimmer, Blandine, 2011. "The optimal choice of central bank independence and conservatism under uncertainty," Journal of Macroeconomics, Elsevier, vol. 33(4), pages 595-606.
    46. Walsh, Carl E, 1995. "Optimal Contracts for Central Bankers," American Economic Review, American Economic Association, vol. 85(1), pages 150-167, March.
    47. Ghosh, Atish R. & Ostry, Jonathan D. & Chamon, Marcos, 2016. "Two targets, two instruments: Monetary and exchange rate policies in emerging market economies," Journal of International Money and Finance, Elsevier, vol. 60(C), pages 172-196.
    48. Edwin M. Truman, 2003. "Inflation Targeting in the World Economy," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 346, October.
    49. Auel, Matias Carlos & de Mendonça, Helder Ferreira, 2011. "Macroeconomic relevance of credit channels: Evidence from an emerging economy under inflation targeting," Economic Modelling, Elsevier, vol. 28(3), pages 965-979, May.
    50. Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002. "Unit root tests in panel data: asymptotic and finite-sample properties," Journal of Econometrics, Elsevier, vol. 108(1), pages 1-24, May.
    51. Maddala, G S & Wu, Shaowen, 1999. "A Comparative Study of Unit Root Tests with Panel Data and a New Simple Test," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(0), pages 631-652, Special I.
    52. Miniaoui, Héla & Smida, Mounir, 2008. "Crédibilité des autorités monétaires et transparence – Quelle complémentarité dans le cas de la Tunisie? Une contribution au débat," L'Actualité Economique, Société Canadienne de Science Economique, vol. 84(2), pages 205-234, juin.
    53. Jordi Galí, 2015. "Monetary Policy, Inflation, and the Business Cycle: An Introduction to the New Keynesian Framework and Its Applications Second edition," Economics Books, Princeton University Press, edition 2, number 10495.
    54. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-491, June.
    55. Ayres, Kelly & Belasen, Ariel R. & Kutan, Ali M., 2014. "Does inflation targeting lower inflation and spur growth?," Journal of Policy Modeling, Elsevier, vol. 36(2), pages 373-388.
    56. Mr. Mark Zelmer & Ms. Andrea Schaechter & Mr. Mark R. Stone & Ms. Alina Carare, 2002. "Establishing Initial Conditions in Support of Inflation Targeting," IMF Working Papers 2002/102, International Monetary Fund.
    57. Posso, Alberto & Tawadros, George B., 2013. "Does greater central bank independence really lead to lower inflation? Evidence from panel data," Economic Modelling, Elsevier, vol. 33(C), pages 244-247.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Jithin P & Suresh Babu M, 2020. "Testing for the Effectiveness of Inflation Targeting in India: A Factor Augmented Vector Autoregression (FAVAR) Approach," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 9(3), pages 163-182.
    2. Emna Trabelsi, 2022. "Macroprudential Transparency and Price Stability in Emerging and Developing Countries," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 11(1), pages 105-129.
    3. Chevaughn van der Westhuizen & Renee van Eyden & Goodness C. Aye, 2022. "Is Inflation Uncertainty a Self-Fulfilling Prophecy? The Inflation-Inflation Uncertainty Nexus and Inflation Targeting in South Africa," Working Papers 202254, University of Pretoria, Department of Economics.
    4. Zams, Bastian Muzbar, 2021. "Frictions and empirical fit in a DSGE model for Indonesia," Economic Modelling, Elsevier, vol. 99(C).
    5. Fabris Nikola, 2022. "Impact of Covid-19 Pandemic on Financial Innovation, Cashless Society, and Cyber Risk," Economics, Sciendo, vol. 10(1), pages 73-86, June.
    6. Waheed, Farah & Abdul Rashid,, 2021. "Credit frictions, fiscal imbalances, monetary policy autonomy, and monetary policy rules," The Journal of Economic Asymmetries, Elsevier, vol. 23(C).
    7. Aslı Güler, 2021. "Does Monetary Policy Credibility Help in Anchoring Inflation Expectations? Evidence from Six Inflation Targeting Emerging Economies," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 10(1), pages 93-111.
    8. Akosah, Nana & Alagidede, Paul & Schaling, Eric, 2019. "Monetary Policy Transparency in Ghana: Recent Evidence," MPRA Paper 96998, University Library of Munich, Germany.
    9. Afees A. Salisu & Elias A. Udeaja & Silva Opuala-Charles, 2022. "Central Bank Independence And Price Stability Under Alternative Political Regimes: A Global Evidence," Bulletin of Monetary Economics and Banking, Bank Indonesia, vol. 25(2), pages 155-172, August.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Goran Petrevski, 2023. "Macroeconomic Effects of Inflation Targeting: A Survey of the Empirical Literature," Papers 2305.17474, arXiv.org.
    2. Petrevski, Goran, 2023. "Macroeconomic Effects of Inflation Targeting: A Survey of the Empirical Literature," EconStor Preprints 271122, ZBW - Leibniz Information Centre for Economics.
    3. Zafar Hayat & Saher Masood, 2022. "Inflation Targeting Skepticism: Myth or Reality? A Way Forward for Pakistan (Article)," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 61(1), pages 1-27.
    4. Svensson, Lars E.O., 2010. "Inflation Targeting," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 22, pages 1237-1302, Elsevier.
    5. Lucotte, Yannick, 2012. "Adoption of inflation targeting and tax revenue performance in emerging market economies: An empirical investigation," Economic Systems, Elsevier, vol. 36(4), pages 609-628.
    6. Kadria, Mohamed & Ben Aissa, Mohamed Safouane, 2016. "Inflation targeting and public deficit in emerging countries: A time varying treatment effect approach," Economic Modelling, Elsevier, vol. 52(PA), pages 108-114.
    7. Philipp F. M. Baumann & Enzo Rossi & Alexander Volkmann, 2020. "What Drives Inflation and How: Evidence from Additive Mixed Models Selected by cAIC," Papers 2006.06274, arXiv.org, revised Aug 2022.
    8. Hippolyte W. Balima & Eric G. Kilama & Rene Tapsoba, 2017. "Settling the Inflation Targeting Debate: Lights from a Meta-Regression Analysis," IMF Working Papers 2017/213, International Monetary Fund.
    9. Minea, Alexandru & Tapsoba, René, 2014. "Does inflation targeting improve fiscal discipline?," Journal of International Money and Finance, Elsevier, vol. 40(C), pages 185-203.
    10. D. Masciandaro, 2019. "What Bird Is That? Central Banking And Monetary Policy In The Last Forty Years," BAFFI CAREFIN Working Papers 19127, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    11. Petrevski, Goran, 2023. "Determinants of Inflation Targeting: A Survey of Empirical Literature," EconStor Preprints 271121, ZBW - Leibniz Information Centre for Economics.
    12. Anna Samarina & Jakob De Haan, 2014. "Right On Target: Exploring The Factors Leading To Inflation Targeting Adoption," Contemporary Economic Policy, Western Economic Association International, vol. 32(2), pages 372-389, April.
    13. Weneyam Hippolyte Balima & Jean-Louis Combes & Alexandru Minea, 2015. "Sovereign Debt Risk in Emerging Countries: Does Inflation Targeting Adoption Make Any Difference?," CERDI Working papers halshs-01128239, HAL.
    14. Balima, Hippolyte W. & Kilama, Eric G. & Tapsoba, René, 2020. "Inflation targeting: Genuine effects or publication selection bias?," European Economic Review, Elsevier, vol. 128(C).
    15. Hove, Seedwell & Tchana Tchana, Fulbert & Touna Mama, Albert, 2017. "Do monetary, fiscal and financial institutions really matter for inflation targeting in emerging market economies?," Research in International Business and Finance, Elsevier, vol. 39(PA), pages 128-149.
    16. Abdelkader AGUIR, 2017. "Lessons learned from Inflation Targeting," Post-Print hal-03791278, HAL.
    17. Lucotte, Yannick, 2010. "The choice of adopting inflation targeting in emerging economies: Do domestic institutions matter?," MPRA Paper 27118, University Library of Munich, Germany.
    18. Hanna Samaryna & Jakob de Haan, 2011. "Right on Target: Exploring the Determinants of Inflation Targeting Adoption," DNB Working Papers 321, Netherlands Central Bank, Research Department.
    19. Harold Glenn A. Valera & Mark J. Holmes & Gazi M. Hassan, 2018. "Is inflation targeting credible in Asia? A panel GARCH approach," Empirical Economics, Springer, vol. 54(2), pages 523-546, March.
    20. Soe, Than Than & Kakinaka, Makoto, 2018. "Inflation targeting and income velocity in developing economies: Some international evidence," The North American Journal of Economics and Finance, Elsevier, vol. 44(C), pages 44-61.

    More about this item

    Keywords

    Credibility; transparency; central bank independence; inflation targeting;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cbk:journl:v:7:y:2018:i:3:p:91-110. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/cbmgvme.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.