Central Bank Credibility in Inflation-Targeting Economies: Do Domestic Institutions Matter?

This paper examines the main institutional determinants of central bank credibility (CBC) from 1990 to 2014. As the CBC is highly concentrated in the right tail of the distribution, the mean-based approaches are an incomplete description of CBC reaction when the parameters are not uniform over the conditional distribution of the credibility. In departing from the problem, I use a Quantile Regression approach, providing superior information on the institutional determinants nexus across various parts of the credibility distribution. Covering 25 inflation targeting economies, I find institutional determinants are prominent and significant at the lower quantiles. This evidence could be attributed to the less sensitivity of the private sector’s expectations to the institutional characteristics. Central bankers, aiming to stabilize the economy, credibility growth, or target inflation, could reduce public expectations by taking into account the non-linear impact of institutional factors on their credibility.