Central bank credibility and political risk premium

Central bank credibility is arguably a function of how central bank is placed with the government organization and fiscal policy credibility (particularly when monetary and fiscal policy gets a bit blurred these days when some central banks purchase sovereign bond to suppress the yield curve), among other things.

A central bank rarely achieves full independence and hence it is subject to the tension of political power within the government organization. It means that central bank independence could be affected by political risk. In addition, it is well established that fiscal risk incorporates political risk premium. And therefore, central bank credibility should be affected by political risk and hence any assets that is affected by central bank credibility should require a certain level of political risk premium.


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