Why Does Central Bank Credibility Weaken without Collapsing? Evidence from Shifting Monetary Policy Priorities

Imagine the economy as a giant, chaotic game of "Follow the Leader," where the most important player is the Central Bank. This bank is like the referee and the coach combined; its main job is to keep the price of everything stable, so a loaf of bread today costs roughly the same as a loaf of bread next year. This job is called "monetary policy," and the most important thing the bank needs to do is earn "credibility." Think of credibility like a reputation for keeping your word. If the bank says, "We will keep prices low," and everyone believes it, then prices stay low because people don't panic and hoard goods. But if the bank says one thing and does another, people stop listening. In the old school of economics, the rule was simple: if the bank keeps missing its price targets for too long, people would stop believing in it completely, and the whole system would crash into chaos, like a game where the referee suddenly starts playing for the other team and everyone runs off the field.

But what happens if the referee doesn't run off the field, but instead starts playing a slightly different game? This is the big question economists have been asking, especially after looking at the recent economic history of Türkiye. The paper you are about to read dives into a puzzle: Why did the Central Bank of Türkiye lose its reputation for keeping prices low, yet the economy didn't completely fall apart? Instead of the usual "total collapse," the researchers found something stranger and more interesting. They discovered that while the bank stopped being a strict "price police," it didn't vanish. Instead, it became a "predictable guide" for a new, messy reality. The study suggests that when politicians start pulling the strings, the bank doesn't lose all its power; it just changes the rules of the game in a way that people can still guess, even if they don't like the new rules.

The Mystery of the Stubborn Bank

For a long time, economists thought that if a Central Bank kept failing to hit its inflation targets (the goal of keeping prices steady), its credibility would just hit zero. It would be like a weather forecaster who keeps saying "sunny" when it's pouring rain; eventually, everyone would stop looking at their forecast entirely. This paper, written by Serkan Çiçek, M. Eray Yücel, and Buket Alkan, decided to test this idea using Türkiye as a case study. They looked at a period where the Central Bank of the Republic of Türkiye (CBRT) faced huge political pressure to change its priorities. Instead of just focusing on keeping prices low, the bank started focusing more on growth, jobs, and keeping the currency from dropping too fast.

The researchers wanted to see: Did the bank's credibility completely collapse, or did it just get weaker but stay alive? To find out, they used a "multidimensional framework," which is a fancy way of saying they didn't just look at one thing. They checked five different ways to measure trust:

1. Target-based: Did people believe the bank's official goals?
2. Pass-through: Did short-term price shocks mess up long-term predictions?
3. Dynamic anchoring: Did expectations stay stuck to the target or drift away?
4. Uncertainty: How confused were people about the future?
5. Probability: Did people's guesses stay inside the bank's "safe zone"?

The Findings: A "Credibility Floor" Instead of a Crash

The results were surprising. The paper found that the bank's credibility did indeed take a massive hit. After 2021, when inflation skyrocketed to over 80 percent, the bank's ability to keep prices low definitely weakened. However, it did not collapse to zero. The authors argue that instead of vanishing, the credibility hit a "floor."

Think of it like a trampoline. In the old view, if you jumped too hard, you'd fall through the trampoline and hit the ground (total collapse). But in this new view, the trampoline just got a lot lower and bouncier. People still knew where the trampoline was; they just knew it was sitting lower than before. Even when inflation was crazy high, people's expectations didn't go wild or become totally random. Instead, they stayed "systematically bounded." This means that even though people expected high prices, they didn't expect infinite prices. They seemed to understand that the bank was playing a different game now—one where high inflation was tolerated to keep jobs and growth up.

The data showed that professional forecasters didn't stop listening to the bank. Instead, they started listening to a different signal. They realized the bank was no longer promising "low prices" but was promising "predictable chaos." The expectations didn't drift away completely; they just shifted up to sit right near the top edge of the bank's forecast range. It was as if the bank said, "We can't promise you low prices, but we promise we won't let the economy go totally crazy," and the people believed that promise.

Why Did This Happen? The Political Switch

The paper explains this by looking at "political dominance." In Türkiye, the government started prioritizing things like employment and economic growth over strict price stability. The bank didn't stop having a legal rule to keep prices low, but in practice, it started doing what the politicians wanted. The authors suggest that people realized this shift. They didn't think the bank was "broken" or "lying"; they thought the bank was just following a new set of instructions.

To prove this, the researchers looked at the "Misery Index," which combines inflation and unemployment. They found that during the high-inflation years, unemployment was going down. This suggests a trade-off: the government was willing to accept high prices if it meant more jobs. The paper calculates that the weight given to unemployment was about 18 times higher than the weight given to inflation during this period. This massive imbalance explains why the bank could keep its credibility floor intact. People saw that the bank was consistently delivering on its new priority (jobs), even if it was failing on its old priority (low prices).

The Bottom Line

So, what does this all mean? The paper suggests that when a Central Bank is under political pressure, it doesn't necessarily lose all its power. It transforms. It stops being a strict "inflation anchor" and becomes a "credibility floor." It's a lower level of trust, but it's a stable one. People stop believing the bank will keep prices low, but they do believe the bank will keep the economy within a predictable, if painful, range.

The authors are careful to say this isn't a "good" thing. It's just a different reality. The bank lost its ability to tightly control inflation, but it kept its ability to signal what the government is willing to tolerate. The study concludes that in a world where politics drives the economy, credibility isn't about hitting a perfect target anymore; it's about being consistent with the new, messy rules of the game. The bank didn't collapse; it just learned to dance to a different, louder tune, and surprisingly, the dancers (the people) kept following along.