Central Bank Credibility and Institutional Resilience

How central banks define their mission and how they are perceived by the public appears to have undergone a substantial shift since the Global Financial Crisis (GFC). Over the past 16 years, the persistence of unconventional monetary policy and subsequent return of inflation have diminished the credibility of central banks as measured, for example, by the gap between expectations and inflation performance. This paper explores whether a loss in confidence in central banks may lead to real institutional effects, hypothesizing that short-term declines in central bank credibility generate a fall in the institutional resilience of an economy. Using data from up to 107 developed and emerging market countries over 27 years, fashioning an explanation of the drivers of institutional resilience, and utilizing system-GMM, we find uniformly that decreased trust in central banks is associated with a significant lowering of resilience.