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Central Bank Credibility and Monetary Policy

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  • Kwangyong Park

    (Economic Research Institute, The Bank of Korea)

Abstract

A numerical measure of central bank credibility, which can be incorporated into a New Keynesian model under bounded rationality, is proposed and analyzed. This measure arises mainly due to the existence of the drifts in private long-term predictions, which are different from those of the central bank. It is shown that central bank credibility matters for macroeconomic stability. As the credibility increases, macroeconomic variables vary less. This generates endogenous volatility changes. Lastly, the magnitude of response of inflation to monetary policy depends on the level of credibility. This suggests that ignoring credibility changes might leads to overestimate of the cost of disinflation.

Suggested Citation

  • Kwangyong Park, 2018. "Central Bank Credibility and Monetary Policy," Working Papers 2018-45, Economic Research Institute, Bank of Korea.
    • Handle: RePEc:bok:wpaper:1845
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    References listed on IDEAS

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    Cited by:

    1. 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).
    2. Park, Kwangyong, 2022. "The excess sensitivity of long-term interest rates and central bank credibility," Economic Modelling, Elsevier, vol. 106(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

    Keywords

    Monetary policy; Credibility; Learning; Bounded Rationality;
    All these keywords.

    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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