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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Original Publication URL: http://dx.doi.org/10.1111/1468-0297.00184

Description/Abstract

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.

Item Type: Article
ISSNs: 0013-0133 (print)
Related URLs:
Subjects: H Social Sciences > HB Economic Theory
Divisions: University Structure - Pre August 2011 > School of Social Sciences > Economics
ePrint ID: 33451
Date Deposited: 20 Dec 2006
Last Modified: 27 Mar 2014 18:20
URI: http://eprints.soton.ac.uk/id/eprint/33451

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