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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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    Cited by:

    1. Park, Kwangyong, 2022. "The excess sensitivity of long-term interest rates and central bank credibility," Economic Modelling, Elsevier, vol. 106(C).
    2. Choi, Sangyup & Furceri, Davide & Loungani, Prakash & Shim, Myungkyu, 2022. "Inflation anchoring and growth: The role of credit constraints," Journal of Economic Dynamics and Control, Elsevier, vol. 134(C).
    3. Cole, Stephen J., 2020. "The influence of learning and price-level targeting on central bank forward guidance," Journal of Macroeconomics, Elsevier, vol. 65(C).
    4. Stephen J. Cole & Enrique Martínez García, 2019. "The Effect of Central Bank Credibility on Forward Guidance in an Estimated New Keynesian Model," Globalization Institute Working Papers 375, Federal Reserve Bank of Dallas, revised 20 Mar 2021.

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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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