Anchoring Inflation Expectations in Selected Asian Countries: The Role of Monetary Policy Credibility

Abstract

Inflation targeting has become a widespread monetary policy framework in many developing countries, and this approach to achieving its goals depends on the level of trust in the central bank. As the central bank's credibility grows, it gains a greater ability to shape the public's expectations regarding inflation. The public adjusts their expectations about future inflation based on the central bank's declared targets. Still, this adjustment depends on their belief in the central bank's capacity to achieve those objectives. Credibility plays a crucial role in disconnecting these expectations from past trends, enabling them to be formed in a forward-looking manner. This study aims to examine the credibility of monetary policy and inflation in the case of selected South Asian countries like Pakistan, India, Sri Lanka, and Bangladesh. The quarterly data are used from 1990Q1 to 2021Q4, but it little bit varies from country to country. The Credibility Index (CI) is used to measure the credibility of monetary policy. The Quantile Regression (QR) is employed to test the impact of monetary policy credibility on inflation. The results indicate that all the variables are stationary at the same level and have dynamic correlations across quartiles and countries. The results from the regression analysis show that the credibility of monetary policy has a negative impact on the inflation rate. This research enhances the understanding of the vital link between credibility and monetary policy effectiveness in developing economies.