Can Central Bank Credibility Improve Monetary Policy? A Meta-Analysis

Cepeda, Valentina; Taboada, Bibiana; Villamizar-Villegas, Mauricio

Can Central Bank Credibility Improve Monetary Policy? A Meta-Analysis

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Borradores de Economía; No.1239

Date published

2023-06-16

Authors

Cepeda, Valentina
Taboada, Bibiana
Villamizar-Villegas, Mauricio

Document language

eng

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Las opiniones contenidas en el presente documento son responsabilidad exclusiva de los autores y no comprometen al Banco de la República ni a su Junta Directiva.

The opinions contained in this document are the sole responsibility of the author and do not commit Banco de la República or its Board of Directors.

Abstract

We bring together the largest meta-analysis ever conducted in the macroeconomic literature to investigate the effects of central bank credibility on monetary policy. With nearly 1,200 surveyed effects, we first confirm that: (i) conventional policy significantly affects inflation and output, and (ii) unconventional policy significantly affects capital flows and the exchange rate. We next evaluate if different measures of credibility amplify these effects. Our findings indicate that central bank transparency has the largest payoff, as it increases policy effectiveness by 69% when dealing with foreign exchange intervention, by 59% when dealing with capital inflows, and by 14% when dealing with conventional policy. An alternative measure, medium and long-term anchoring in inflation expectations, is the runner up, increasing effectiveness by 31%, 9%, and 10%, respectively. Other measures, such as central bank independence and short-term anchoring in inflation expectations have lower and in some cases null effects.

Description

Reunimos el primer meta-análisis sobre el impacto que tiene la credibilidad de los bancos centrales en la política monetaria. Con cerca de 1.200 efectos reportados, primero confirmamos que: (i) la política convencional significativamente afecta la inflación y el crecimiento económico y (ii) la política no convencional afecta significativamente los flujos de capital y tasa de cambio. Segundo, evaluamos si diferentes medidas de credibilidad amplifican estos efectos. Nuestros hallazgos indican que la transparencia del banco central tiene el mayor impacto, ya que aumenta la efectividad en un 69% cuando se trata de intervención cambiaria, en un 59% cuando se trata de flujos de capital, y en un 14% cuando se trata de la política convencional. Otras medidas de credibilidad, como el anclaje de expectativas de inflación y la independencia del banco, también magnifican la política monetaria, pero en menor proporción.