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Central Bank Credibility and Monetary Policy

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  • Kwangyong Park

    (Bank of Korea)

Abstract

In this paper, a numerical measure of central bank credibility is proposed that can be incorporated into a New Keynesian model under bounded rationality. This measure arises due to the existence of the changes in private beliefs, which are different from those of the central bank. It is shown that central bank credibility matters for macroeconomic stability. Specifically, as credibility increases, macroeconomic variables vary less since private agents’ expectations are more anchored. Through this channel, the model generates endogenous volatility changes. Finally, the credibility of the Federal Reserve and the European Central Bank are computed based on the proposed method.

Suggested Citation

  • Kwangyong Park, 2023. "Central Bank Credibility and Monetary Policy," International Journal of Central Banking, International Journal of Central Banking, vol. 19(2), pages 145-197, June.
    • Handle: RePEc:ijc:ijcjou:y:2023:q:2:a:3
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    References listed on IDEAS

    as
    1. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
    2. Schaumburg, Ernst & Tambalotti, Andrea, 2007. "An investigation of the gains from commitment in monetary policy," Journal of Monetary Economics, Elsevier, vol. 54(2), pages 302-324, March.
    3. Charles I. Plosser, 2010. "Credible commitments and monetary policy after the crisis : a speech at the Swiss National Bank Monetary Policy Conference, Zurich Switzerland, September 24, 2010," Speech 42, Federal Reserve Bank of Philadelphia.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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