Transcript Central-Bank-Credibility-and-Reputation

Central Bank Credibility and
Reputation: An Historical Analysis
Presentation at the 7th SEEMHN Conference
“Tales of Two Crises: The Great Recession and the
Great Recession in South-East Europe”
Pierre L. Siklos, Wilfrid Laurier University
& Balsillie School of International Affairs, Waterloo, Canada
Back Story
• Prior to the ‘crises’, CB & even academics – at
least in my part of the world – struggled to accept
the relevance of historical analyses of MP
• Fortunately, some CB ignored the critics and
pushed to create historical databases
– A shining example: Norges Bank’s 2016 project
• “The joint publication of a data volume of
harmonized long-run time series on monetary,
financial and other macroeconomic variables” for
SEE is welcome and I hope to use it for the
present project!
Premise
• There are ‘swings’ in the credibility &
reputation of central banks
• These swings may be tied to the reliance on
the commitment to maintain ‘policy rules’
which contained ‘escape clauses’
– An example: the Gold Standard
• Some CB were successful: Britain, France, Germany
• Others were not:
WARNING!
• This is very much work in progress (with
Michael Bordo)
– Comments are welcome
– Our minds can be changed and our views will no
doubt evolve!
– Only descriptive evidence today; formal results
will have to wait until April 2013
Objective
• Can we quantify the evolution of CB credibility
over time and changes in its reputation?
– Domestic component: legislation, monetary policy
strategy, overall economic & political environment
– External component: exchange rate regime, CB
cooperation, financial crises
• Emphasis in the literature so far has been on
theoretical predictions
CB Credibility: Definition
• The “…extent to which the public believes that a
shift in policy has taken place when, indeed, such
a shift has actually occurred.“(Cukierman 1986,
p.6)
• It is best thought of as a flow like variable, rising
and falling over time as monetary policy
strategies change, subject to the evolving nature
of central bank-government relations, and is even
a function of political factors and the
personalities who implement policies.
CB Reputation: Definition
• Can be likened to a stock variable.
• The reputation of a central bank can be built
up over time as its performance improves or it
can be diminished if a financial crisis is
mishandled or there is a serious crisis of
confidence in the governor or a debilitating
conflict between the monetary authority and
the government.
Elements of Credibility & Reputation
• ‘Identification’ problem has always been a challenge:
two concepts are clearly intertwined
• Elements of credibility & reputation building
– A ‘track record’...but this requires a benchmark: inflation,
relative to a forecast, a target, a definition of ‘price
stability’
• MEASURABLE IN THE SHORT-RUN AND OVER A LONG TIME SPAN
– A clear division of responsibilities with the fiscal authority
• MEASURABLE OVER THE LONGER-RUN, A TIMES OF CRISES, IN THE
LEGISLATIVE RECORD, AND OVER A LONG TIME SPAN
– Clear and effective communication
• PUBLIC AND PRIVATE COMMUNICATION BOTH MATTER,
MEASURABLE OVER A LONG TIME SPAN BUT...A SEA CHANGE
TOOK PLACE BEGINNING IN THE 1990s especially
Theories of Credibility & Reputation
CB Credibility & Reputation: An Historical Analysis
THE NARRATIVE
Then and Now:
Governance of Monetary Policy
• THEN
– Little de jure
independence, but some
de facto independence
(Friedman’s personalities
hypothesis): Strong,
Norman, Moreau, Schacht
• Not viewed as essential
• CB were a ‘tool’ of the
state
– Decisions followed a ‘topdown’ view (Genoa 1922,
Bretton Woods 1944)
• NOW
– CB autonomy begets
accountability which
fosters transparency
– Greater international
cooperation among CB
– Still a ‘top-down’ approach
(e.g., G20, Basel)...is it still
due to complexity?
Financial Crises
• SOURCES
– Currency
– Banking
– Sovereign debt
• TYPES
– Systemic
– ‘borderline’
Then and Now: Financial Crises and CB
• THEN
– Gold standard (later the GES) was
the coordinating/cooperating
device. The concern was over
adherence the ‘rules of the game’:
‘CB the only game in town’
– Ideology promoted a ‘steady as she
goes’ approach, a reluctance to
consider ‘unorthodox’ policies
when required
– With few exceptions modest
changes in the
legislative/regulatory environment
– Initially, little sober second thinking
about the role of MP
• NOW
– Multiple agencies play a role
but are CB still ‘the only game
in town’?
• Governance implications
– International cooperation is
fluid, there is no effective
coordination mechanism
• Concern over spillovers &
contagion but less so over the
rules of the game
– “Do whatever it takes”
attitude
Then and Now: Recoveries and CB
• THEN
– Fiscal policy a secondary
or effectively nonexistent tool
– Little thought given to
the coherence between
fiscal & monetary
policies
– Blurring of fiscal and MP
not a concern
• NOW
– Fiscal policy has swung
from passive to active
and seeks to be passive
again
– Persistent doubts about
the impact of fiscal
policy
– Blurring of fiscal and MP
is a recurring concern
The Narrative: A Summary
What Next?
• PREMISE
– Central to the consequences of a financial crisis,
recoveries, and stability more generality are CB
credibility & reputation
– Credibility is reflected in deviations from trend in an
observable macroeconomic variable associated with
MP, such as inflation/output
• MACROECONOMIC PERFORMANCE DOMINATES
– Reputation is reflected in the duration of a MP
strategy, low turnover in CB governors (i.e.,
personalities), ability to respond to a crisis
• INSITITUTIONAL CHARACTERISTICS DOMINATE
Data
• Annual since the formation of 20+ central
banks (around the world)
• Econometric & narrative approach co-mingled
• Sources of data from datasets authors have
constructed over the years, as well as other
available historical datasets
Methodology I
• Part I:
– Central bank performance is typically assessed according to the
behavior of inflation or the price level
• In an historical study it is unclear how we should define the
benchmark against which inflation deviates from some expected value
• We consider a number of approaches:
– We apply statistical break tests to determine breaks in the price level. This
permits us to evaluate one indicator of deviations of realized inflation from
some expectation, namely deviations from a statistically estimated trend
inflation rate;
– We can specify a time series model to estimate expected inflation. Models
based on a New Keynesian type Phillips curve work well over long periods of
time and, subject to ‘breaks’, can also serve as a useful benchmark;
– For the more recent history, that is, the last three decades of data, we can
substitute private sector forecasts of inflation, or inflation targets set by
central banks as a robustness test
Methodology II
• We then ask how the constructed credibility indicator
reacts to the past history of inflation, various proxies for
economic growth performance, or the output gap, the
stage and shape of particular business cycle events
• We also aim to empirically establish whether credibility
behaves asymmetrically over time
• A neglected aspect of the historical analysis of central bank
credibility and reputation is how these can be transmitted
across countries. Certain policy regimes (e.g., a pegged
exchange rate) have long been known to permit countries
to ‘import’ inflation performance from abroad. Whether
central bank credibility and reputation can be similarly
imported is another matter
Methodology III
• We estimate a model of credibility using a factoraugmented GVAR model
– Designed to capture the transmission of shocks across
countries and across time
– The GVAR model begins by estimating N-country specific
VAR models that focus on the role of largely domestic
sources of shocks or global exogenous shocks (e.g., oil
prices, wars)
– A second step then is to incorporate foreign shocks. This is
accomplished by adding a cross-country weighted average
of foreign shocks where the latter are assumed to be
(weakly) exogenous and are constructed on the basis of
VARs estimated in the first step
Methodology IV
• Part II
– We relate reputation to the personality at the head of central bank
and the length of time the governor is in place
• We normalize this variable according to the length of time a governor is
statutorily entitled to be in office
– The reputation of a central bank will also be influenced by the quality
of governance in the public sector
• Indicators of governance (e.g., type of political system, political and economic
freedom, protection of property rights, quality of the justice system, etc…) are
likely to be associated with central bank reputation
– Central bank governors and governance indicators might interact with
each other. In this case a combined variable can be considered as a
proxy for the reputation of the monetary authority
• Reputation might also be determined by governance structures that define the
relationship between the central bank and government, including the degree
of central bank independence
Methodology V
• Estimate a quantile regression model which allows us
to estimate whether central banks that have
particularly high reputations are associated with a type
of policy regimes
– Designed to estimate relationships where the investigator
is not interested in only mean responses but rather wishes
to know whether the response of the variable of interest,
here central bank reputation, differs across the distribution
of the indicator of reputation
– Investigate whether central banks with high reputations
are less prone to seeing a reduction when they are less
credible, or in response to some other economic shock, as
well as relative to central banks who have a lower
reputation
Source: T. Lane (2012), “Weathering the
Headwinds to Canada’s Economic Growth”,
Bank of Canada, 21 November.
Source: T. Lane (2012), “Weathering the
Headwinds to Canada’s Economic Growth”,
Bank of Canada, 21 November.
Source: T. Lane (2012), “Weathering the
Headwinds to Canada’s Economic Growth”,
Bank of Canada, 21 November.
1,480,000
5.6%
Millions of 2002 Chained $
1,440,000
3.2%
1,400,000
0.5%
1,360,000
Latest release of real GDP against select
vintages of potential real GDP. I have
extrapolated potential real GDP, using
2008Q1, using a simple linear trend as the
actual series is virtually linear towards the
end of the sample.
The simple point is that, unless one is clear
about whether a ‘structural’ shift has taken
place and the source of this shift – this is
entirely unclear to me I must confess – the
cumulative output loss since the recession
of 2008-9 could be rather large.
1,320,000
1,280,000
1,240,000
I
II
III
2008
IV
I
II
III
IV
I
2009
real GDP 2012Q2
Potential real GDP 2009Q2
II
III
2010
IV
I
II
III
IV
2011
Potential real GDP 2008Q1
Potential real GDP 2012Q2
I
II
2012
Output gaps - US
3
4
4
2
2
2
0
1
0
0
P e rce n t
P e rce n t
-2
-4
-1
-2
-4
-6
-2
-6
-8
-3
-10
-8
-4
-12
-10
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
January 2008
December 2009
December 2008
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
July 2009
August 2009
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
June 2010
March 2011
December 2010
August 2011
US Potential Output- CBO Estimate
2.0
1.5
Normalized
1.0
0.5
0.0
-0.5
-1.0
-1.5
-2.0
2000
2002
2004
2006
CBO 2000 prices - 2009 vintage
2008
2010
2012
2014
CBO 2005 prices - August 2011 vintage
Source: Almunia et. al. (2010)
Source: Reinhart & Rogoff (2012),
“This Time is Different Gain?...”