A Simple Empirical Measure of Central Banks' Conservatism

Abstract

In this paper we suggest a simple empirical and model-independent measure of Central Banks' Conservatism, based on the Taylor curve. This new indicator can easily be extended in time and space, whatever the underlying monetary regime of the considered countries. We demonstrate that it evolves in accordance with the monetary experiences of 32 OECD member countries from 1980, and is largely equivalent to the model-based measure provided by Krause & Méndez [Southern Economic Journal, 2005]. We finally bring forward the interest of such an indicator for further empirical analysis dealing with the preferences of Central Banks.

Institutional Arrangements and Inflation Bias: A Dynamic Heterogeneous Panel Approach

“…We show that the same applies to inflation volatility. Moreover, we evaluate how different supervisory arrangements impact policy "inputs" in the shape of central banks' preferences, measured by a central bank's conservatism (CBC) index as in Levieuge and Lucotte (2014) and Levieuge, Lucotte, and Pradine-Jobet (2019). These results shore up our main conclusion that central banks with both monetary policy and banking supervision functions do not display lower inflation aversion than those with a single mandate of price stability.…”

Central Bank Independence and Inflation Preferences: New Empirical Evidence on the Effects on Inflation

“…4 To measure CBI, we use the (weighted) aggregate legal index proposed by Cukierman et al (1992) which is bounded between 0 and 1, with higher values signalling a higher level of independence of the central bank. Following the methodology by Levieuge and Lucotte (2014), we construct the index of central bank conservatism for an extended sample of advanced and developing economies over the period 1992-2014. In particular, we derive the index of CBC based on inflation and output gap volatilities.…”

“…Although the distinction between CBI and CBC has been addressed theoretically, most empirical studies that examine the effect of CBI on inflation, do not take into account how central bank preferences may potentially evolve over time, partly due to the absence of a simple measure to capture central bank preferences. Recently, Levieuge and Lucotte (2014) constructed an index that captures the relative preferences of the monetary authority and is essentially founded on the inflation-output gap volatility trade-off. In contrast to earlier attempts in the literature, this proxy, measuring the relative preferences of the central bank for inflation as compared to the output gap stabilisation, can be effortlessly generalised over time and across economies, while it is independent of the monetary regime in effect.…”

“…the degree of conservatism, of the central bank. In this regard, we extend the index of CBC based on the proposed methodology by Levieuge and Lucotte (2014) over a long time span, including the recent global financial crisis. Compared to the static analysis that is prevalent in the literature, our dynamic panel modelling framework accounts for the persistence of inflation as well as for country heterogeneity, while it allows for the potential endogeneity of the institutional features of monetary policy.…”

The Politics of Central Bank Independence

“…An alternative way to measure central bank conservativeness has been proposed by Levieuge and Lucotte (2014). They use the so-called Taylor curve, showing the trade-off between the variability of the inflation rate and the variability of the output gap, which is derived from the minimization of a central bank's quadratic loss function.…”