Importing credibility through exchange rate pegging
Herrendorf, Berthold (1997) Importing credibility through exchange rate pegging. Economic Journal, 107, (442), 687-694. (doi:10.1111/1468-0297.00184).
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This paper employs an optimal taxation framework in order to study the credibility of monetary policy-making in an open economy. Since inflation is, in part, uncontrollable due to stochastic disturbances, the authority's actions cannot be monitored perfectly when the exchange rate floats, thus implying that reputational forces may become ineffective. In contrast, pegging the nominal exchange rate to a low-inflation currency allows perfect monitoring, because the exchange rate is, in principle, controllable. For this reason, exchange rate pegging may import credibility and result in the best reputational equilibrium, even though the authority retains the discretion to devalue unexpectedly.
|Subjects:||H Social Sciences > HB Economic Theory|
|Divisions:||University Structure - Pre August 2011 > School of Social Sciences > Economics
|Date Deposited:||20 Dec 2006|
|Last Modified:||06 Aug 2015 02:30|
|RDF:||RDF+N-Triples, RDF+N3, RDF+XML, Browse.|
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