Abstract
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.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
References
Catao, L. V. A., & Terrones, M. A. (2005). Fiscal deficits and inflation and TIIPS. Economic Commentary, pp. 1–4. Federal Reserve Bank of Cleveland.
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.
De Mendonca, H. F., & Tiberto, B. P. (2017). Effect of credibility and exchange rate pass-through on inflation: An assessment for developing countries. International Review of Economics and Finance, 50(C), 196–244.
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).
Lin, H. Y., & Chu, H. P. (2013). Are fiscal deficits inflationary? Journal of International Money and Finance, 32(1), 214–233.
Mishkin, F. S. (2009). Globalization, macroeconomic performance and monetary policy. Journal of Money, Credit and Banking, 41, 187–196.
Mishkin, F. S., & Savastano, M. A. (2001). Monetary policy strategies for Latin America. Journal of Development Economics, 66(2), 415–444.
Montes, G. C. (2013). Credibility and monetary transmission channels under inflation targeting: An econometric analysis from a developing country. Economic Modelling, 30, 670–684.
Montes, G. C., & Bastos, J. C. A. (2014). Effects of reputation and credibility on monetary policy: Theory and evidence for Brazil. Journal of Economic Studies, 41(3), 387–404.
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 polÃticas públicas, p. 46.
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.
Sims, C. A. (2011). Stepping on a rake: The role of fiscal policy in the inflation of the 1970. European Economic Review, 55, 48–56.
Author information
Authors and Affiliations
Rights and permissions
Copyright information
© 2019 The Author(s)
About this chapter
Cite this chapter
Ndou, E., Gumata, N., Tshuma, M.M. (2019). Is the Impact of High Monetary Policy Credibility on Consumer Price Inflation and the ERPT Reinforced by Fiscal Policy Credibility?. In: Exchange Rate, Second Round Effects and Inflation Processes. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-13932-2_19
Download citation
DOI: https://doi.org/10.1007/978-3-030-13932-2_19
Published:
Publisher Name: Palgrave Macmillan, Cham
Print ISBN: 978-3-030-13931-5
Online ISBN: 978-3-030-13932-2
eBook Packages: Economics and FinanceEconomics and Finance (R0)