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Assessing ECB?s Credibility During the First Years of the Eurosystem: A Bayesian Empirical Investigation

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  • Gianni Amisano
  • Marco Tronzano

Abstract

This paper extends Svensson (1994) ?simplest test?of in?ation target credibility inside a Bayesian econometric framework. We apply this approach to the initial years of the Eurosystem and obtain various estimates of ECB?s monetary policy credibility. Overall, our empirical evidence is robust to alternative prior assumptions, and suggests that the strategy followed by the ECB was successful in building a satisfactory degree of reputation. However, we find some significant credibility reversals concerning both anti-inflationary and anti-deflationary credibility. These reversals, in turn, are closely related to the evolution of the cyclical macroeconomic conditions in the Euro area.

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Paper provided by University of Brescia, Department of Economics in its series Working Papers with number ubs0512.

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Date of creation: 2005
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Handle: RePEc:ubs:wpaper:ubs0512

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References

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  1. Lars E.O. Svensson, 1999. "How should monetary policy be conducted in an era of price stability?," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, Federal Reserve Bank of Kansas City, pages 195-259.
  2. Lars E.O. Svensson, 2000. "The First Year of the Eurosystem: Inflation Targeting or Not?," NBER Working Papers 7598, National Bureau of Economic Research, Inc.
  3. Tronzano , Marco, 2005. "Inflation Targeting and Credibility: A Note on the Recent Empirical Literature," Economia Internazionale / International Economics, Camera di Commercio di Genova, vol. 58(4), pages 489-506.
  4. Lars E.O. Svensson, 1999. "Monetary Policy Issues for the Eurosystem," NBER Working Papers 7177, National Bureau of Economic Research, Inc.
  5. De Grauwe, Paul, 1996. "Inflation Targeting to Achieve Inflation Convergence in the Transition Towards EMU," CEPR Discussion Papers 1457, C.E.P.R. Discussion Papers.
  6. Fuhrer, Jeffrey C, 1997. "The (Un)Importance of Forward-Looking Behavior in Price Specifications," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 29(3), pages 338-50, August.
  7. Jordi Galí & Mark Gertler, 1998. "Inflation dynamics: A structural econometric analysis," Economics Working Papers 341, Department of Economics and Business, Universitat Pompeu Fabra.
  8. Michael Reutter & Hans-Werner Sinn, 2000. "The Minimum Inflation Rate for Euroland," CESifo Working Paper Series 377, CESifo Group Munich.
  9. Stephen G. Cecchetti & Mark A. Wynne, 2003. "Inflation measurement and the ECB's pursuit of price stability: a first assessment," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 18(37), pages 395-434, October.
  10. Rodriguez-Palenzuela, Diego & Castelnuovo, Efrem & Nicoletti-Altimari, Sergio, 2003. "Definition of price stability, range and point inflation targets: the anchoring of long-term inflation expectations," Working Paper Series 0273, European Central Bank.
  11. Svensson, Lars E O, 1994. "The Simplest Test of Inflation Target Credibility," CEPR Discussion Papers 940, C.E.P.R. Discussion Papers.
  12. Arminio Fraga & Ilan Goldfajn & André Minella, 2004. "Inflation Targeting in Emerging Market Economies," NBER Chapters, in: NBER Macroeconomics Annual 2003, Volume 18, pages 365-416 National Bureau of Economic Research, Inc.
  13. Guy Meredith & Bankim Chadha & Paul R. Masson, 1991. "Models of Inflation and the Costs of Disinflation," IMF Working Papers 91/97, International Monetary Fund.
  14. John M. Roberts, 1994. "Is inflation sticky?," Working Paper Series / Economic Activity Section 152, Board of Governors of the Federal Reserve System (U.S.).
  15. Giancarlo Corsetti & Paolo Pesenti, 1999. "Stability, Asymmetry, and Discontinuity: The Launch of European Monetary Union," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 30(2), pages 295-372.
  16. Svensson, L.E.O., 1990. "The Simplest Test of Target Zone Credibility," Papers 469, Stockholm - International Economic Studies.
  17. Vittorio Corbo & Oscar Landerretche & Klaus Schmidt-Hebbel, 2001. "Assessing Inflation Targeting after a Decade of World Experience," Working Papers 51, Oesterreichische Nationalbank (Austrian Central Bank).
  18. Lars E. O. Svensson, 2003. "Monetary Policy and Real Stabilization," NBER Working Papers 9486, National Bureau of Economic Research, Inc.
  19. Lorenzo Codogno & Carlo Favero & Alessandro Missale, 2003. "Yield spreads on EMU government bonds," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 18(37), pages 503-532, October.
  20. Tronzano, Marco & Psaradakis, Zacharias & Sola, Martin, 2000. "Assessing the Credibility of a Target Zone: Evidence from EMS Countries," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 5(2), pages 107-20, April.
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Cited by:
  1. Laurence Fung & Ip-wing Yu, 2007. "Assessing the Credibility of The Convertibility Zone of The Hong Kong Dollar," Working Papers 0719, Hong Kong Monetary Authority.

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