The authors: Prof. Christopher Hartwell (Kozminski University) and Prof. Pierre Siklos test whether the post–Global Financial Crisis decline in central bank credibility has hard institutional consequences. Using data for up to 107 advanced and emerging economies over 27 years and employing system-GMM estimation, they find a consistent relationship: lower trust in the central bank is associated with lower institutional resilience. Since the 1990s, a 1% decline in central bank credibility is linked, on average, to about a 3.6% decline in a country’s institutional resilience.
A central bank effectively sells one product: a credible promise of stability. Prices, contracts, investment decisions, and public expectations are built on that promise. After 2008, central banks relied longer and more intensively on unconventional tools, and the later return of inflation widened the gap between what people expected and what happened. The authors treat this gap as a signal of eroding credibility.
A thesis that goes beyond inflation
The core idea is simple, but with large implications: when central bank credibility falls, the problem is not “only” monetary policy. The authors hypothesise that short-term declines in credibility can reduce an economy’s institutional resilience, understood as the system’s capacity to absorb shocks and adapt. This shifts the discussion from “does the central bank hit its target” to “what happens to institutions when trust in the anchor of stability weakens”.
Measuring something as intangible as credibility
The study does not rely on impressions or a single proxy. The authors build a credibility measure from three elements: a “penalty” for missing the inflation target (explicit or implicit), a monetary-policy uncertainty measure based on inflation and growth forecast errors, and a global component that accounts for the external inflation environment. The logic is practical: credibility is a mix of outcomes (inflation performance), predictability (uncertainty), and exposure to external shocks.
In parallel, institutional resilience is defined as the combination of an economic and a political component. The economic side includes, among others, protection of property rights captured through “contract-intensive money” (the share of money held within the formal banking sector), exchange-rate regime flexibility, and external openness in terms of trade and capital flows. The political side includes measures such as the level of democracy, constraints on executive power, and government size proxied by government expenditure as a share of GDP. The two components are weighted equally.
Result: credibility loss comes with an institutional cost
Across a large dataset and multiple specifications, the result is consistent: lower trust in the central bank is associated with significantly lower institutional resilience. The headline figure is striking since the 1990s, a 1% decline in central bank credibility corresponds, on average, to about a 3.6% decline in institutional resilience. Importantly, the relationship remains visible when the sample is split into pre- and post–Global Financial Crisis periods.
What this means in practice for the economy and business
For policymakers, the message reads like a warning: central bank credibility is not “soft reputation”. It is an asset that stabilises the broader institutional ecosystem. When it weakens, the economy loses part of its capacity to cope with shocks.
For business, this suggests that credibility indicators should be read as more than commentary on the future path of interest rates. In this study, credibility correlates with institutional resilience, meaning the durability of rules and the capacity of the system to function under stress. That perspective helps interpret country risk at a time when monetary policy and institutions are assessed not by declarations, but by the ability to deliver on core promises.
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Based on the article: International Journal of Central Banking, vol. 21(4), 2025 | prof. Christopher A. Hartwell, prof. Pierre Siklos | Central Bank Credibility and Institutional Resilience
