Determinants of Central Bank Credibility and Macroeconomic Performance Evidence from Eastern European and Latin American Countries

In this paper, by using a vector autoregressive approach on panel data (PVAR) and decomposing the central bank credibility index into several important aspects highlighted in the literature, we emphasize the effects of these aspects of credibility on macroeconomic performance, and vice versa, for six emerging economies. A higher level of credibility is associated with lower interest rates, higher effective exchange rates, and a positive effect on economic activity. We show that the beneficial effects of credibility may be attributed mainly to achieved targets and past inflation. However, transparency and credible actions concerning public debt and country risk management can enhance these effects. Finally, an important policy implication might be the identification of the aspects of credibility that are altered when different shocks occur. We show that a positive long-term interest rate shock negatively affects the aspects of credibility concerning inflation performance and country risk, whereas in the case of a positive currency shock, credibility aspects concerning transparency, country risk, and fighting inflation improve.