The Quarterly Review of Economics and Finance 52 (2012) 266271

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The Quarterly Review of Economics and Finance

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Monetary policy credibility: A Phillips curve view

Christopher Malikane , Tshepo Mokoka
School of Economic and Business Sciences, University of the Witwatersrand, 1 Jan Smuts Avenue, Johannesburg 2050, South Africa

a r t i c l e

i n f o

Article history:
Received 2 August 2011
Received in revised form 27 April 2012
Accepted 24 May 2012
Available online 1 June 2012
JEL classication:
E43
E52

a b s t r a c t
The paper investigates the presence of monetary policy credibility in eight countries by ltering the
residuals from an augmented Phillips curve. Two of the eight countries (US and New Zealand) exhibit
robust credibility effects across samples. Two countries (South Africa and the UK) exhibit credibility effects
in the sample involving the 1990s, but these effects disappear in the sample beginning in 2000. The rest
of the countries do not exhibit monetary policy credibility. Given that seven of the eight countries have
adopted an explicit ination-targeting framework, we conclude that there is very weak evidence that this
framework enhances monetary policy credibility. These results are however sensitive to how ination
and the output gap are measured.
2012 The Board of Trustees of the University of Illinois. Published by Elsevier B.V. All rights reserved.

Keywords:
Credibility
Ination expectations
Monetary policy

1. Introduction
This paper uses a Phillips-curve based method to investigate the extent of central bank credibility in eight countries.
Since Kydland and Prescott (1977), credibility has been viewed
as an important ingredient in the conduct of monetary policy.
According to Blinder, Ehrmann, Fratzscher, De Haan, and Jansen
(2008) credibility helps with making disination less costly. Credibility also helps the central bank gain public support for its
actions. This view is shared by, for example, Bertola and Caballero
(1992), Bertola and Svensson (1993) and Demertzis, Marcellino,
and Viegi (2008). However, empirical analyses suggest that central banks are not perfectly credible. This may be due to the
fact that, as Lohman (1992) argues, in order to optimize monetary policy commitment and retain credibility, central banks must
be allowed to exercise exible policy responses to unforeseen
contingencies.
The most relevant place where the theory of credibility is
applied is the Phillips curve. Blinder (2000) notes that the
so-called credibility hypothesis says that perfectly credible preannouncements of disination will reduce ination expectations
abruptly. Therefore if the central bank is credible relatively low
unemployment is required to bring about a drastic fall in the
ination rate. By implication, slight increases in the interest rate

Corresponding author. Tel.: +27 11 717 8109; fax: +27 11 717 8081.
E-mail address: christopher.malikane@wits.ac.za (C. Malikane).

must deliver drastic declines in ination through a downward

revision of ination expectations, thereby shifting the Phillips
curve downwards. Ultimately therefore, the test for credibility
must involve a test of the extent to which ination expectations are negatively related to changes in the short-term interest
rate.
There are at least two ways in which ination expectations
are extracted. One way relies on surveys as in Berk (1999), Aron
and Muellbauer (2007), Ang, Bekaert, and Wei (2007), Arnold and
Lemmen (2008) and Henzel (2008), and the other extracts ination
expectations from the bond rate. In the latter case, by combining the Fisher relation and the expectations theory of the term
structure, it can be shown that the bond rate contains information about future ination. Goodfriend (1993) and Mehra (1996)
for example, argue that the term structure is useful in predicting movements of future ination rates for some periods for
the US.
In this paper, we investigate the extent to which monetary policy is credible in eight countries: South Korea, South Africa, Mexico,
New Zealand, Australia, Canada, the United States and the United
Kingdom. The contribution of this paper is that it uses the Phillips
curve to extract ination expectations. The hypothesis that this
paper seeks to prove is that, if monetary policy is credible, there
will be a negative relationship between ination expectations and
the nominal interest rate, as pointed out by Blinder (2000).
The paper is structured as follows: Section 2 derives the
model that extracts ination expectations from the Phillips
curve, and uses the nominal interest rate to test for the
presence or absence of monetary policy credibility. Section

1062-9769/$ see front matter 2012 The Board of Trustees of the University of Illinois. Published by Elsevier B.V. All rights reserved.
http://dx.doi.org/10.1016/j.qref.2012.05.002

C. Malikane, T. Mokoka / The Quarterly Review of Economics and Finance 52 (2012) 266271

3 provides empirical results of the tests and Section 4

concludes.
2. Monetary policy and ination expectations
The objective of this paper is to construct a measure of ination expectations and to use this measure to test for the presence
of monetary policy credibility. Our method begins by specifying
an all-encompassing empirical expectations-augmented Phillips
curve, which includes a measure of demand pressure, import price
ination, the labour share, money supply, fuel and food price ination. Our Phillips curve formulation is a modied version of the one
found in Blinder (2000) in that it adds other determinants of ination over and above ination expectations and demand pressure.
The Phillips curve takes the following form:

t1 +
t = te + xt1 + qt1 + zt1 + mt1 +  
fuel

t1 + t ,

food

(1)
te

is the expected ination

where t is the actual ination rate,
rate, xt represents demand pressure measured by the output gap,
qt is the log of the price of imports denominated in domestic currency, zt is the labour share which represents cost push from the
tfuel
labour market, mt is the deviation of money supply from trend, 

t are real fuel price and food price ination respectively

and 
and t represents a disturbance term that is serially uncorrelated.
We assume, as noted by Rudebusch (2005), that there are inertial
lagged responses of ination to its determinants due to the prevalence of contracts and menu-costs. The above specication requires
some explanation.
The New Keynesian literature, e.g. Gali, Gertler, and LpezSalido (2001), Gali, Gertler, and Lpez-Salido (2005), Woodford
(2001), Lind (2005), Sbordone (2005) among others, uses either
marginal cost or the output gap but not both. Our justication
for including both these variables can be found in Gordon (1998),
Bardsen, Jansen, and Nymoen (2004), Asada, Chen, Chiarella, and
Flaschel (2006) and Fair (2008). These authors interprete the labour
share as a cost-push variable over and above standard measures
of excess demand such as the unemployment or output gap. We
also include excess money supply as suggested by Ando, Brayton,
and Kennickell (1992) and Mohanty and Klau (2004) to capture
its impact on the ination rate. The role of the monetary aggregate in the Phillips curve is discussed by Nelson (2003), Gerlach
and Svensson (2003), Ireland (2004) and Woodford (2006). Lastly,
real fuel and food price ination are specied as supply-side shock
variables in the triangle model of ination by Gordon (1998).
The specic way in which ination expectations are formed
is a subject of considerable debate. Two ways of specifying te
ow from the work of New Keynesian economists. One way uses
Et (t+1 |t ), which denotes an expectation at time t of ination
at time t + 1, based on the information set t . Another way is to
formulate a hybrid specication which assumes that a fraction
of agents are backward-looking while the other fraction (1 ) is
forward-looking. This leads to te = t1 + (1 )Et (t+1 |t ). In
GMM estimations of New Keynesian Phillips Curves, the information set is made up of the instrumental variables such as lags of
ination, interest rate, output gap or unit labour cost and commodity prices. However Fair (2008) argues that the use of these lags is
not theoretically appropriate. He says: To use these lags, one has
to argue that the equation is part of a larger model in which the
lags appear, but this is not very satisfying.
Mavroeidis (2005) further argues that the parameters of the
New Keynesian Phillips Curve are weakly identied. He argues
that full information methods, rather than single-equation GMM
food

267

estimations, may be preferable because they are more robust

to mis-specication problems. Using the Generalized Empirical
Likelihood estimation, Martins and Gabriel (2009) also nd weak
identication, which casts serious doubts about the validity of
the New Keynesian Phillips Curve. The same result is obtained by
Bardsen et al. (2004), on the basis of the rst-stage regression F-test.
Similarly Rudd and Whelan (2005) show that (a) the instruments
that are usually used in the GMM estimations of the New Keynesian Phillips Curve imply that the parameters of the second-stage
regression will be downward-biased and (b) the reduced-form
expression of the second-stage regression features only lagged
ination.
At an empirical level, Bardsen et al. (2004) nd that the allencompassing model that features both labour share and the
output gap, and higher lags of ination, makes the forward-looking
component of the hybrid Phillips curve insignicant. Yet, this
specication of the Phillips curve passes standard tests of misspecication in contrast to the NKPC. Boug, Cappelen, and Swensen
(2010) also nd that the NKPC as formulated by Gali and Gertler
(1999) is rmly rejected by the data for both the US and Euro-area.
Fair (2008) also shows that the FIML estimation of the NKPC delivers an insignicant forward-looking component. Gordon (2011)
and Fair (2008) nd that the NKPC fails to outperform traditional
specications. Gordon (2011) in particular argues that the NKPC
may be relevant in high ination episodes whilst the traditional
specication with only lagged ination may be relevant in stable
and moderate ination environments.
However Kozicki and Tinsley (2003), Ireland (2007) and Cogley
and Sbordone (2008) nd that the observed persistence of ination may be accounted for by the time-variation of underlying
ination rather than lagged ination. In this case we may specify
te as te = t + (1 )Et (t+1 |t ), where t is the time-varying
component of trend-ination. This specication does not feature the backward-looking component because empirically, Cogley
and Sbordone (2008) nd that the backward-looking component
becomes insignicant when time-variation of trend-ination is
taken into account.
Cognisant of this on-going debate, our paper argues that if ination expectations have a forward-looking element, then such an
element must be inuenced by the prevailing stance of monetary
policy provided there is some level of credibility, as pointed out
by Blinder (2000). Therefore the basic assumption that we make
is that ination expectations are time-varying. Note that we can
write Eq. (1) as follows:

t1 +
t = xt1 + qt1 + zt1 + mt1 +  
fuel

t1 +
t ,

food

(2)

where
t = te + t . Ination expectations in the Phillips curve are
contained in the term
t . We postulate that if monetary policy
is credible, then ination expectations contained in
t respond
to changes in the short term nominal interest rate. Note that the
disturbance term t does not respond to changes in the nominal
interest rate. The reason for this is that E(te t ) = 0. If both expected
ination and the disturbance term were affected by the nominal
interest rate, there would be some correlation between the two
arising from the movement in the nominal interest rate.
We expect that
t will exhibit some persistence. This persistence can be grounded in the two explanations found in the
literature. Firstly,
t may be persistent because past ination may
affect current ination through a combination of expectations formation and overlapping wage and price contracts as noted by
Fuhrer and Moore (1995) and Gordon (1998). Secondly,
t may
be persistent because of the time-variation of trend ination as
noted by Kozicki and Tinsley (2003), Ireland (2007) and Cogley
and Sbordone (2008). Our specication does not favour any of

268

C. Malikane, T. Mokoka / The Quarterly Review of Economics and Finance 52 (2012) 266271

these explanations. Instead, it encompasses both in the sense

that embedded in
t is a persistent process arising from te since
E(t tj ) = 0.
If the central bank is credible, the te component of
t is expected
to respond signicantly to changes in the nominal interest rate. Following the literature, we assume that
t is persistent. This allows
us to formulate the following relationship to capture the effects of
monetary policy credibility on the Phillips curve:

t = (L)
t (L)rt + t ,

(3)

where rt is the change in the nominal interest rate, (L) measures
the extent to which
t is persistent, (L) > 0 captures the response
of
t to changes in the nominal interest rate and t is the component of the composite shock that does not respond to changes in
the nominal interest rate. Ireland (2007) and Cogley and Sbordone
(2008) specify the process that drives trend ination to follow a
driftless random walk. On the other hand, the Gordon-type specication would require that the coefcients of lagged ination sum
to unity. Accordingly, these two strands of literature support us in
specifying that (1) = 1. The larger is (L) the more credible is monetary policy. If (1) < 0, then monetary policy cannot deliver a low
ination environment. In this instance, ination expectations do
not respond in a desirable manner to movements in the nominal
interest rate. That is, increases in the nominal interest rate do not
lower ination expectations.
3. Empirical strategy and results
The econometric strategy we employ in our test for credibility involves a two-stage procedure in the extraction of
t . In the
rst stage we estimate Eq. (2). From Ireland (2007), Cogley and
Sbordone (2008) and Gordon (1998) we know that
t is autocorrelated. In order to generate unbiased and efcient estimates of the
parameters of the Phillips curve, we follow the two-step procedure
proposed by Pindyck and Rubinfeld (1998, p. 590). In the rst step
we estimate Eq. (2) using OLS in line with Judge et al. (1985, p.
 t . In the second step, we
295) to obtain errors which we denote

 t in order to generate
re-estimate Eq. (2) augmented with lags of

unbiased and efcient estimates of the parameters of the Phillips

curve. The second-step regression takes the form:

t1
zt1 + mt1 +  
t = xt1 + qt1 + 
fuel

t + t ,
t1 + (L)


food

(4)

 t is the error term obtained from the rst-step regression,

where

 t and t is a serially
(L) denotes the coefcients of the lags of

uncorrelated error-term. From Eq. (4) we then obtain the estimate

 t . It is this estimate of
t that we take to Eq. (3),
of
t as
t = (L)

which tests for central bank credibility. The method outlined above
can be viewed as 2SLS, in which the rst-step regression generates
errors whose lags are then used as instruments for
t in the secondstep regression. Alternatively the procedure mentioned by Pindyck
and Rubinfeld (1998, p. 590) can be viewed as NLS (see also Judge
et al. (1985, chap. 8) and Davidson and McKinnon (2004, chap. 7)).1
An important issue with Phillips curve estimations is that
of identication, as brought to the fore by Mavroeidis (2004),
Mavroeidis (2005), Bardsen et al. (2004) and Martins and Gabriel
(2009). Martins and Gabriel (2009) compute identication-robust
condence sets for the parameters of the NKPC in order to test

1
For a model yt = xt + ut with ut = ut1 + t , we can show that
yt yt1 = (xt xt1 ) + t is the same as yt = xt + ut1 + t . This can be
generalized to models with higher-order autocorrelation.

for weak identication. Mavroeidis (2005) uses the so-called concentration parameter, which is the minimum eigenvalue of the
conventional concentration matrix. A concentration parameter less
than 10 is considered to indicate weak identication. In this paper
we approach this question by using the simple procedure proposed
by Bardsen et al. (2004). In this procedure, F-statistic of the rststage regression of the instrumental variable estimation is used
to test for weak identication. If this F-statistic is less than 10
this would be indicative of weak identication. We also report the
probability of the F-statistic to check the joint signicance of the
rst-stage variables.
A potential problem with the estimation of Eq. (3) is the
endogeneity of rt . It is now common for central banks to use
the short-term nominal interest rate as a policy instrument (see
for example, Clarida, Gali, and Gertler (2000)). Because
t contains ination expectations, a forward-looking central bank would
respond to changes in ination expectations thereby rendering rt
potentially endogenous. In order to account for this possibility, we
rst specify a regression of the following form:
rt = r0 +
t + t .

(5)

Therefore in running the regression for Eq. (3), we use  t instead

of rt because  t is that component of the changes in the interest rate that is purged of inuences from
t . Lastly, we make use
of the Wald-statistic to test for the signicance of the sum of the
coefcients of the interest rate change in Eq. (3).
In terms of sample selection, we estimate the equations for
the period where the literature suggests there has been a signicant shift in monetary policy and we also test whether the
results are altered for the sample in the 2000s. For example in
the case of the US, the literature suggests that 1979 represents a
turning point in the conduct of monetary policy, see Clarida et al.
(2000) and Goodfriend and King (2005) in this regard. In the rest
of the countries a recent and signicant shift in monetary policy
occurred when these countries adopted ination targeting. Therefore we start the sample on the basis of the dates provided by Fraga,
Godfajn, and Minella (2003). In the case of South Africa, there is
evidence that the country adopted implicit ination targeting in
1989 after the de Kock Commission recommendations. Nevertheless it would be useful to see if the explicit adoption of this policy
framework strengthened central bank credibility there.
The estimations are conducted using quarterly data from
1980Q1 to 2009Q4, sourced from the International Monetary Fund.
For each country, we run the regressions for two sample periods to
test for the robustness of the results to sample period. For example
in Tables 1 and 2 in the case of Australia, we estimate the regressions for the rst sample 1996Q12009Q4 (denoted 96)*** and
the second sample in 2000Q1 2009Q4 (denoted ****00). We calculate the ination rate by using the consumer price index since
all the central banks in our study have this measure of ination
as a target, the nominal short-term interest rate is the treasury
bill rate, output is measured by real GDP and the output gap is
measured using the HodrickPrescott lter. The prices for imports,
fuel and food are measured using the consumer price indices for
imports, food, and fuel. In relation to money supply, we use M3 for
Australia, South Africa, New Zealand and Mexico. For Korea we use
M2 and the money market rate for the short-term interest rate. For
Australia we also used the money market rate for the short-term
interest rate. For the US and the UK we used M2 and M4 for money
supply, respectively. The deviation of money supply from trend is
measured using the HodrickPrescott lter.
Table 1 presents the results for Eq. (4). We test serial correlation by using the LjungBox Q(4), the DurbinWatson statistic and
the Chi-squared LM test. We test for conditional heteroskedasticity
by using the ARCH Chi-squared test. While the regressions exhibit

C. Malikane, T. Mokoka / The Quarterly Review of Economics and Finance 52 (2012) 266271

Australia

Canada

269

South Korea

.05

.06

.04

.05

.03

.04

.02

.03

.01

.02

Mexico
.065

.06
.05
.04

.060
.055
Vt
Inflation

.050

.03

.045

.02
.01

Vt
Inflation

.040
Vt
Inflation

.00

.00

-.01

-.01
97

98

99

00

01

02

03

04

05

06

07

08

.035
.030

.00
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

09

Vt
Inflation

.01

New Zealand

99

United Kingdom

00

01

02

03

04

05

06

07

08

2002

09

2003

2004

United States

2005

2006

2007

2008

2009

South Africa
.14

.12

.05

.10

.04

.12

.07

.08
Vt
Inflation

.03
.06

.06

.10

.05

.08

.04

.06

.03

.02
.04

.04

.02
.02

.01
Vt
Inflation

.00

-.01

.01

.02

.00
.00

97 98 99 00 01 02 03 04 05 06 07 08 09

88

90

92

94

96

98

00

02

04

06

08

Vt
Inflation

-.04

-.02
86

.00
-.02

-.01

-.02
95 96

Vt
Inflation

84 86 88 90 92 94 96 98 00 02 04 06 08

95

96

97

98

99 00

01

02

03

04

05 06

07

08

09

Fig. 1. Ination and estimated ination expectations (vt).

joint signicance of the variables in the rst-stage regression, the

level of the rst-stage regression F-statistic shows that there is an
identication problem in Australia. Only the UK and the US do not
exhibit an identication problem. For the rest of the countries the
problem of identication appears to be dependent on the sample
period.
On the basis of the estimations in Table 1, we then extract
 t , which contains ination expectations. Fig. 1 plots this

t = (L)

variable. The gure illustrates the signicant role that is played by

ination expectations in the dynamics of ination. The variable
t
closely tracks the actual ination rate.
Table 2 presents estimates of Eq. (3), where  t is used as an
instrument for rt in order to deal with the issue of endogeneity.
All the regressions are adequate in the sense that they pass the
diagnostic tests, except for the UK equations in relation to normality. Of interest in the test for credibility is the sign and signicance
of (1). Only for three countries; New Zealand, the UK and the US
are there robust credibility effects. In these countries, credibility
is present and signicant in the sample containing the 1990s and
the one beginning in 2000. In the case of South Africa, signicant
credibility effects are present in the 1990s sample, however these
effects disappear in the 2000s. This is interesting because in the
2000s the South African Reserve Bank adopted explicit ination targeting. With an explicit ination target, we would have expected
central bank credibility to be enhanced, as noted by Fraga et al.
(2003) among others.
Our nding that monetary policy is not credible in Canada is not
consistent with Amano, Fenton, Tessier, and Van Norden (1997)
and Perrier and Amano (2000), who nd that Canadas monetary
policy has been credible since the adoption of ination targeting.
In the case of the US, Goodfriend (1993) nds that the Fed had
acquired credibility since 1983, while Grkaynak, Levin, Marder,
and Swanson (2007) nd that ination expectations have not been
completely anchored by the Fed. We nd stronger credibility effects
of the Fed for the sample beginning in 1983 than the recent sample
that begins in 2000. For the UK and Australia our results are consistent with Johnson (1998), who uses survey data and nds that

between 1984 and 1995 monetary policy targets were not credible for the two countries. However, like Johnson (1998), we nd
monetary policy credibility for New Zealand.
Our nding on the credibility of monetary policy for South Africa
is not consistent with Aron and Muellbauer (2007) who nd, using
survey data, that monetary policy credibility effects have been signicant for the country since 2000. Our nding for Mexico is not
consistent with Schmidt-Hebbel and Werner (2002). They nd that
the ination target exerts a credible and strong inuence on private sector expectations. Despite its adoption of ination targeting
in 1998, we nd that the Bank of Korea is not credible.
In order to check whether these ndings are robust to alternative measures of ination and measurement of the output gap, we
re-estimated Eqs. (2) and (3) using ination based on the GDP deator and output detrended using a polynomial time trend. Generally
we nd that the results based on the deator are not consistent
with the ones that are contained in this paper. However, the results
based on the de-trended output are consistent with the results that
are reported in this paper, except for New Zealand (20002009).
Nevertheless, in view of the fact that all the countries that are in
our sample target CPI-based ination, it is clear that an appropriate
measure of ination is the one based on the CPI.
In order to examine the possible sources of the inconsistency
between our results and those found in the literature, we performed two procedures. Firstly, we computed correlations between
our measure of ination expectations and the ones based on surveys and the yield curve for a selected number of economies (viz.
the US, UK, Australia and South Africa). Secondly, we estimated Eq.
(3) using survey-based and yield curve based measures to check
if we arrive at the same results. We nd weak correlation among
the three measures. For example for the UK the correlation coefcient between our measure and the one based on the yield curve
is 0.11, between the yield curve measure and surveys is 0.42, and
between our measure and surveys is 0.29. In terms of credibility
tests based on the yield and survey expectations, only the US has
results that are consistent with our measure. Therefore, the inconsistency between our results and those found using alternative

270

Table 1
Estimations of the Phillips curve (Eq. (4)) (standard errors in parentheses).
Coeff

Aus

Kor

Mex

NZ

96

00

Can
93

00

99

01

93

00

UK
82

00

US
83

00

SA
93

00

0.43 (0.13)
0.004 (0.01)

0.31 (0.13)
0.05 (0.02)

0.39 (0.08)

0.41 (0.10)

0.11 (0.05)
0.03 (0.006)
0.06 (0.04)

0.05 (0.03)
0.05 (0.01)

0 . 173 (0.09)
0.01 (0.01)
0 . 253 (0.38)

0.10 (0.12)
0.02 (0.02)
1 . 123 (0.42)

0.87 (0.05)

0.72 (0.06)

0.23 (0.05)
0.07 (0.02)

0.42 (0.09)
0.07 (0.02)

0.61 (0.17)

0.32 (0.32)
0.12 (0.04)

0 . 012 (0.03)

0.07 (0.02)
0.08 (0.05)

0.07 (0.03)
0.18 (0.06)

0.04 (0.02)

0.007 (0.009)
0.07 (0.03)

0.03 (0.01)

R2
2 (4)
Q(4)
DW
2A (4)
JB
Fprob
Fstat

0.90
0.26
0.78
1.59
0.90
0.72
0.01
3.60

0.81
0.25
0.60
1.23
0.57
0.70
0.06
2.44

0.77
0.19
0.93
1.91
0.93
0.53
0.00
10.34

0.47
0.16
0.71
2.03
0.86
0.60
0.00
6.84

0.88
0.40
0.96
1.95
0.93
0.82
0.00
42.53

0.89
0.18
0.68
2.04
0.48
0.96
0.00
11.63

0.92
0.16
0.68
2.02
0.86
0.49
0.00
32.96

0.05 (0.09)

0.60
0.17
0.93
2.14
0.95
0.32
0.00
6.74

0.63
0.53
0.36
2.11
0.44
0.97
0.00
14.19

0.72
0.69
0.19
1.96
0.29
0.91
0.00
22.72

0.93
0.29
0.87
2.11
0.82
0.91
0.00
20.86

0.43 (0.05)

0.63 (0.09)

0.87
0.12
0.77
1.61
0.73
0.57
0.01
3.91

0.97
0.30
0.57
2.29
0.60
0.33
0.00
10.71

Superscript above the estimate of the parameter denotes the lag of the variable.

Probability.

Table 2
Post ination targeting estimations of credibility (standard errors in parentheses).
Coeff

1
2
3
4
5
0
1
2
(1)
2

R
2 (4)
Q(4)
DW
2A (4)
JB
*
**

Aus

Kor

Mex

NZ

96

00

Can
93

00

99

01

93

00

82

00

83

00

93

00

1.14 (0.09)
0.14 (0.09)

1.45 (0.12)
0.82 (0.09)

1.00 (0.00)

0.68 (0.11)

1.00 (0.00)

1.00 (0.00)

0.75 (0.07)
0.22 (0.08)
0.17 (0.08)

0.96 (0.16)
0.14 (0.07)
0.16 (0.20)

1.41 (0.09)
0.46 (0.13)
0.08 (0.07)
0.31 (0.00)

1.43 (0.17)
0.27 (0.25)
0.59 (0.26)

1.49 (0.07)
0.51 (0.13)
0.03 (0.00)

0.87 (0.11)

1.20 (0.10)
0.35 (0.18)
0.04 (0.16)
0.11 (0.00)

1.22 (0.08)
0.22 (0.08)

0.10* (0.04)

0.26* (0.12)

0.45* (0.03)
0.30* (0.05)

0.46* (0.13)
0.33* (0.15)

0.57* (0.07)
0.40* (0.05)

0.56 (0.12)

0.37 (0.25)
1.17* (0.28)

0.15* (0.06)

0.13 (0.29)

0.17* (0.05)

0.95
0.39
0.56
2.04
0.63
0.00

0.73
0.36
0.67
1.97
0.79
0.00

0.97
0.47
0.89
1.79
0.91
0.35

0.37 (0.09)
0.33 (0.18)
0.17 (0.24)
0.39 (0.18)
0.22 (0.22)

0.98* (0.23)
1.03* (0.23)

0.85
0.15
0.56
1.59
0.69
0.63

0.75
0.28
0.45
2.26
0.39
0.25

5% signicance.
10% signicance.
Probability.

UK

0.32 (0.11)
0.52* (0.10)

0.05 (0.30)

0.79* (0.23)
0.81* (0.25)

0.40* (0.17)

0.17** (0.08)

0.10 (0.28)
0.56
0.48
0.32
2.14
0.30
0.53

0.53
0.39
0.20
2.09
0.22
0.63

0.43
0.68
0.83
2.4
0.67
0.96

0.73
0.19
0.17
1.93
0.75
0.95

0.90
0.81
0.48
1.74
0.27
0.17

0.47
0.11
0.55
1.88
0.34
0.65

US

SA

0.36 (0.13)
0.49 (0.11)
0.03* (0.01)

0.80* (0.30)
0.74
0.91
0.91
1.82
0.56
0.38

0.86
0.16
0.62
1.63
0.63
0.40

0.81
0.48
0.87
1.54
0.91
0.21

C. Malikane, T. Mokoka / The Quarterly Review of Economics and Finance 52 (2012) 266271

0.70
0.64
0.31
1.57
0.44
0.67
0.02
4.47

0.06 (0.06)

C. Malikane, T. Mokoka / The Quarterly Review of Economics and Finance 52 (2012) 266271

measures of expectations may have to do with the way ination

expectations are measured.2
Therefore the conclusion that we draw from these results is that,
from the Phillips curve perspective, the evidence that the ination
targeting framework enhances the credibility of monetary policy
is mixed. Furthermore, among the countries where there are credibility effects, New Zealand appears to be the only one that has
increased its credibility over the two sample periods, although the
standard error of the credibility parameter has also increased. We
also observe that the credibility of UK monetary policy is not significant in the 2000s while it was signicant in earlier periods. In the
case of the US, credibility seems to have declined when we look at
the size of the credibility parameter although its quality, measured
by the standard error, has improved.
4. Conclusion
This paper extracts ination expectations from the Phillips
curve in order to test for the credibility of monetary policy in eight
countries. We argue that the presence of credibility should translate into a negative relationship between changes in the short-term
nominal interest rate and ination expectations. We do not nd signicant and robust credibility of monetary policy in the countries
in our sample except for the UK, US and New Zealand.
This nding casts serious doubt on the claims that monetary
policy, especially with the advent of ination targeting, has gained
in credibility by way of affecting ination expectations. We propose that future research be undertaken to reconcile the Phillips
curve approach that we use in this paper and the one that is based
on surveys. Furthermore, future research may have to explore
alternative ways in which credibility effects nd expression in the
Phillips curve.
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Results for the measure of ination based on the deator and time de-trended
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