Bordo, M. & Siklos, P. (2014) “Central-bank credibility, reputation and inflation targeting in historical perspective“, VoxEU Organisation, 12 December.
Central bank credibility is critically linked to communication and commitment. This column analyses the historical evolution of credibility, showing its prewar peak and the subsequent dip from which it did not fully recover until the 1980s. Inflation targeting has played a key role in establishing credibility in both developed and emerging market economies.
Central banks have been around since the 17th century. Central bank credibility has waxed and waned during this period. In many countries, an important contributor to the achievement of credibility has been the introduction of inflation targeting.
Our research examines the evolution of central bank credibility using historical narratives and empirics for a group of advanced and emerging market economies. It shows that credibility has moved like a pendulum, swinging high under the classical gold standard before 1914, dipping after 1914, and not fully recovering until the 1980s. The advent of inflation targeting contributed to the further enhancement of central bank credibility. [RB2] The historical depictions consist of six central banks, three of which are advanced economies (US, UK, and Germany) while the remaining countries are considered emerging market economies (Chile, Colombia, and Mexico). The econometric evidence examines data since the creation of the central banks in our sample as well as more recent evidence covering the past two or three decades.
Relevant posts:
- Acharya, V. & Steffen, S. (2014) “Benchmarking the European Central Bank’s asset quality review and stress test: A tale of two leverage ratios“, VoxEU Organisation, 21 November.
- Mitchell, B. (2014) “Direct central bank purchases of government debt“, Bill Mitchell Blog, 02 October.
- Miller, Μ. & Zhang, L. (2014) “To exit the Great Recession, central banks must adapt their policies and models“, VoxEU Organisation, 10 September.