Importing credibility through exchange rate pegging
Importing credibility through exchange rate pegging
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.
687-694
Herrendorf, Berthold
3cf68f14-808a-42a7-9642-85b757775096
1997
Herrendorf, Berthold
3cf68f14-808a-42a7-9642-85b757775096
Herrendorf, Berthold
(1997)
Importing credibility through exchange rate pegging.
Economic Journal, 107 (442), .
(doi:10.1111/1468-0297.00184).
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.
This record has no associated files available for download.
More information
Published date: 1997
Organisations:
Economics
Identifiers
Local EPrints ID: 33451
URI: http://eprints.soton.ac.uk/id/eprint/33451
ISSN: 0013-0133
PURE UUID: d7487de9-415a-46ee-9e80-f7e2e0ce2c8f
Catalogue record
Date deposited: 20 Dec 2006
Last modified: 15 Mar 2024 07:44
Export record
Altmetrics
Contributors
Author:
Berthold Herrendorf
Download statistics
Downloads from ePrints over the past year. Other digital versions may also be available to download e.g. from the publisher's website.
View more statistics