:: year 14, Issue 49 (12-2021) ::
JMBR 2021, 14(49): 421-452 Back to browse issues page
Interest rate and output gap: Does central bank credibility matter?
Vahid Taghinezhadomran *1, Elham Kamal1
1- University of Mazandaran
Abstract:   (384 Views)
This paper studies the effects of central bank credibility on nominal interest rate and output gap on 17 inflation targeting (IT) developing countries using Instrument Variables (IV) over a period that spans 24 years (1996-2019). In the first stage, using new Keynesian model is obtained “Credibility loss” index to measure the importance of central bank past performance and its deviation from its target. The findings show the existence of a non-linear effect of credibility loss on deviation of past inflation from target, the existence of positive and significant effect of credibility loss index on interest rate, the existence of positive and significant effect of nominal interest rate on output gap, and finally the existence of positive and significant effect of credibility loss index on output gap by interest rate channel. These findings suggest that the central banks increase the credibility of the policies set by improving their performance over time by increasing the accountability, reducing the effect of political pressures on policy-making and increasing their commitment to the determined goals and also by creating positive beliefs among economic agents control their expectations and reduce the pressure of existing shocks and have a positive effect on macro variables.
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Type of Study: Empirical Study | Subject: Monetary Policy, Central Banking, and the Supply of Money and Credit (E5)
Received: 2020/12/7 | Accepted: 2021/12/25 | Published: 2022/03/12

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year 14, Issue 49 (12-2021) Back to browse issues page