Central bank transparency and monetary policy credibility: international evidence considering different aspects of transparency

Abstract

Central bank transparency plays a crucial role in enhancing monetary policy credibility, which is vital for macroeconomic performance. Despite its importance, the relationship between transparency and credibility remains underexplored. This study addresses this gap by providing international evidence on the link between central bank transparency and monetary policy credibility. Recognizing that central bank transparency is a multidimensional concept, we examine the individual effects of five transparency dimensions on credibility. Our sample includes 92 countries (75 of which are developing countries) over the period from 1998 to 2019. In addition to the overall sample, we analyze sub-samples, particularly focusing on developing countries due to their history of economic instability, high inflation, and lower credibility relative to developed countries. Additionally, we consider the impact of the inflation targeting regime adopted by several countries in the sample. Our findings highlight the significance of transparency in boosting credibility, with political, operational, and economic aspects having the most substantial effects.