Is the Impact of High Monetary Policy Credibility on Consumer Price Inflation and the ERPT Reinforced by Fiscal Policy Credibility?
Evidence shows that the exchange rate appreciation, inflation and inflation expectations decline are larger due to persistently rising fiscal policy and monetary policy credibility shocks compared to the non-persistent shocks. In addition, we establish that strong fiscal policy credibility reinforces the effects of monetary policy credibility shocks leading to a larger exchange rate appreciation, larger declines in inflation outcomes and inflation expectations. Thus, we conclude that strong fiscal policy credibility reinforces the monetary policy credibility effects on the exchange rate, inflation outcomes and inflation expectations in achieving the price stability mandate. Thus, the persistence of monetary policy credibility shock matters for the exchange rate, inflation outcomes and inflation expectations.
- Catao, L. V. A., & Terrones, M. A. (2005). Fiscal deficits and inflation and TIIPS. Economic Commentary, pp. 1–4. Federal Reserve Bank of Cleveland. Google Scholar
- De Mendonca, H. F., & Silva, R. (2016). Observing the influence of fiscal credibility on inflation: Evidence from emerging economy. Economic Bulletin, 36(4), 2333–2349.Google Scholar
- De Mendonca, H. F., & Tostes, F. S. (2014). The effects of monetary and fiscal credibility on exchange rate pass-through in an emerging economy. Open Economy Review, 26(4).Google Scholar
- Lin, H. Y., & Chu, H. P. (2013). Are fiscal deficits inflationary? Journal of International Money and Finance, 32(1), 214–233.Google Scholar
- Mishkin, F. S. (2009). Globalization, macroeconomic performance and monetary policy. Journal of Money, Credit and Banking, 41, 187–196.Google Scholar
- Montes, G. C., & Curi, A. (2016). The importance of credibility for the conduct of monetary policy and inflation control: Theoretical model and empirical analysis for brazil under inflation targeting. planejamento e políticas públicas, p. 46.Google Scholar
- Montes, G. C., de Oliveira, A. J., & Nicolay, R. (2016). Fiscal credibility and central bank credibility: How do we build them? Empirical evidence from Brazil. https://www.anpec.org.br/encontro/2016/submissao/files_I/i4-50a1fd601dbf10d1c01d0d88a52b299c.pdf.
- Sargent, T., & Wallace, N. (1986). Some unpleasant monetarist arithmetic. Federal Reserve Bank of Minneapolis, Quarterly Review, 5, 1–17.Google Scholar