The Reputation of a Newly Born Central Bank

Quaderni dell'Istituto di Economia e Finanza Working Paper No. 51

25 Pages Posted: 25 Feb 2003

See all articles by Zeno Rotondi

Zeno Rotondi

UNICREDIT; LUISS Guido Carli University

Giacomo Vaciago

Catholic University of the Sacred Heart of Milan - Institute of Economy and Finance

Date Written: February 2003

Abstract

The effectiveness of monetary policy - i.e. its capacity to maintain a low rate of inflation without adverse effects on employment - crucially depends on the credibility of the Central Bank. According to Blinder (2000), this amounts to the reputation that has been earned through a consistent track record: "a history of matching words with actions". Therefore, almost by definition a newly born central bank will lack any credibility, unless.... Unless, it can inherit the reputation of a pre-existing central bank, like in the case of the ECB.

In this paper, we test the hypothesis - for which we find strong evidence - that not only in terms of institutional structure (and location: Frankfurt), but also in terms of the weights in its preference function, the ECB has so far closely resembled the Bundesbank. It is somewhat ironic that it has been the German economy which has not taken any benefit from that set up.

Keywords: Bundesbank, Central Bank, ECB, EMU, Interest Rate Rule, Lexicographic Preferences, Monetary Policy

JEL Classification: E42, E52, E58

Suggested Citation

Rotondi, Zeno and Vaciago, Giacomo, The Reputation of a Newly Born Central Bank (February 2003). Quaderni dell'Istituto di Economia e Finanza Working Paper No. 51, Available at SSRN: https://ssrn.com/abstract=378860 or http://dx.doi.org/10.2139/ssrn.378860

Zeno Rotondi (Contact Author)

UNICREDIT ( email )

VIA SPECCHI 16
ROME, 00186
Italy

HOME PAGE: http://docenti.luiss.it/rotondi

LUISS Guido Carli University ( email )

Via O. Tommasini 1
Rome, Roma 00100
Italy

Giacomo Vaciago

Catholic University of the Sacred Heart of Milan - Institute of Economy and Finance ( email )

Via Necchi 5
20123 Milano
Italy

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