Endogenous Central Bank Credibility in a Small Forward-Looking Model of the U.S. Economy
AbstractThe linkages between inflation and the economy's cyclical position are thought to be strongly affected by the credibility of monetary authorities. The author complements existing research by estimating a small forward-looking model of the U.S. economy with endogenous central bank credibility. His work differs from the existing literature in several ways. First, he endogenizes and estimates credibility parameters, allowing inflation expectations to be a mix of backward- and forward-looking agents. Second, his models include both outcome- and action-based credibility. Third, he estimates a non-linear relation between policy credibility and divergences of inflation from target, which is also assumed to change over history. Finally, the author's non-linear time-varying credibility indexes do not rely on a two-regime definition, but on a continuum of credibility regimes. The author finds strong, stable, and statistically significant outcome- and action-credibility effects that generate important inflation inertia. According to his results, the value of the endogenous credibility indexes has risen steadily across the different monetary policy regimes.
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Bibliographic InfoPaper provided by Bank of Canada in its series Working Papers with number 05-16.
Length: 36 pages
Date of creation: 2005
Date of revision:
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Transmission of monetary policy; Econometric and statistical methods; Inflation and prices;
Find related papers by JEL classification:
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-07-18 (All new papers)
- NEP-CBA-2005-07-18 (Central Banking)
- NEP-FMK-2005-07-18 (Financial Markets)
- NEP-MAC-2005-07-18 (Macroeconomics)
- NEP-MON-2005-07-18 (Monetary Economics)
- NEP-POL-2005-07-18 (Positive Political Economics)
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