Breaking%20Credibility%20in%20Monetary%20Policy%3A%20The%20Role%20of%20Politics%20in%20the%20Stability%20of%20the%20Central%20Banker

Working Papers

Breaking Credibility in Monetary Policy: The Role of Politics in the Stability of the Central Banker


CODE: WP-639
AUTHOR(s): Rueda, Miguel
PUBLISHED: September 2008
LANGUAGE: English
RELATED TOPICS: Government and Democracy
DOWNLOAD FILE IN: English

Abstract:

This paper studies the relationship between the hazard rate of the exit of a president of a central bank and a measure of credibility in monetary policy. The expected hazard rate of exit is estimated as a function of legal and political variables. The measure of credibility is the expected probability of a disinflation beginning when inflation is rising. For a sample of 22 Latin American and G7 countries, I find a negative relationship between the hazard rate of exit and the measure of credibility. This provides evidence of the expected relationship between independence and credibility not found in previous cross country studies. Using the executive’s party ideology as a measure of aversion to inflation, there was no evidence that this relationship is different for countries where the government is identified as more conservative. However, when a president of the central bank appointed by a conservative government is in office, a rise in the probability of a disinflation beginning when inflation was rising was found. The results show that legal independence after controlling for the hazard rate of the president’s exit is not associated with credibility gains.

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