Testing credibility with time-varying coefficients

The article presents evidence on credibility gains from the adoption of Inflation Targeting (IT), for a set of developed and emerging markets. We carry out our analysis for Brazil, Mexico, Sweden and the UK, and ask whether the adoption of this monetary framework strengths monetary policy credibility. To answer this question we apply a time-varying coefficients methodology to estimate the time path of the trade-off between inflation and output. Following the literature a more favourable trade-off is believed to be linked to improvements in monetary policy credibility. The results show a clear picture of credibility gains from the adoption of IT.