A Study On The Institutional Characteristic Factor Affecting Monetary Policy Credibility

Credibility of monetary policy refers to the trust of the public on the monetary policy controlling the inflation. The credibility of monetary policy can effectively solve the time-inconsistency problem. The stronger it is, the more effective monetary policy is, the more stable the public's inflation expectation is, and thus the less costly disinflation is. Therefore, it is of great significance to study the factor of the monetary policy credibility.Domestic and international studies find that there are five factors of the monetary policy credibility: central bank independence, accountability, transparency, and its history of honesty and history of fighting inflation. They will be divided into two kinds: institutional characteristic factor (including central bank independence, accountability and transparency of monetary policy) and behavioral characteristic factor (including the history of central bank honesty and its history of fighting inflation). Usually, the domestic and foreign scholars only analyze the relationship among the three factors within the institutional characteristic factor, and they do not study the intrinsic association between the two types of factors. They do not attempt to identify the dominant factor of the monetary policy credibility. Therefore, the paper attempts to achieve a breakthrough in this area, and further takes it as a starting point to provide ideas of improving the credibility of monetary policy.The paper is carried out as following:(1) In the theoretical part, first of all, the paper describes the institutional characteristic factor and behavior one on the mechanism of monetary policy credibility. Institutional characteristic factor:①based on principal-agent theory and political business theory, the paper analyzes the role of central bank independence played on the credibility.②The paper analyzes the"information effect"and"incentive effect"of transparency which affects the credibility through a theoretical model.③Based on the principle that central bank should assume the responsibilities and obligations to the public and the government, the paper analyzes how the accountability affect the credibility. Behavior characteristic factor: Based on the expectation self-realization mechanism and the high default costs, the paper analyzes the mechanism of behavior characteristic factor affecting the credibility. After the analysis of the mechanisms on the credibility, the paper analyzes the intrinsic relationship between the two factors, and concludes the institutional factor is the dominant factor of the credibility in the opinion of the institutional arrangements determining its behavioral characteristic. Then, based on the present studies, the paper sorts out the current common measurements of central bank independence, accountability and monetary policy transparency, and puts forward two new measurements: coefficient proportion in Taylor Rule and inflation volatility.(2) In the empirical part, firstly, to confirm the impact of central bank independence on the credibility, the paper compares the inflation volatility rates before and after the independence reform. The result shows that increasing the independence reduces the inflation volatility. So does the mean equality test result. Secondly, to confirm the impact of transparency on the credibility, the paper compares the inflation volatility rates before and after the transparency reform. The result shows that increasing the transparency reduces the inflation volatility. So does the mean equality test result. Thirdly, to confirm the conclusions once again, the paper introduces two multiple regression models. The results show that conclusions are still valid. Furthermore, the paper tests the relevance between independence, transparency sub-indicators and inflation volatility respectively. The results show that the correlations are not obvious. The paper argues that, it is largely because of the measurements which mix some human factors and do not wholly reflect the reality. Finally, to overcome this flaw, the paper conducts a survey to examine the relation between the central bank and inflation among the public. The result confirms the view that the institutional characteristic factors are the dominant for the monetary policy credibility.(3) In the last, through the compare the domestic and foreign situations, the paper concludes that there is not much room to increase the central bank independence due to the restrict of the politic system, judicature condition, economic and financial infrastructure and culture condition, but it can try to make some progress on the monetary policy transparency to promote the credibility.