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Importing credibility through exchange rate pegging

Record type: Article

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.

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Citation

Herrendorf, Berthold (1997) Importing credibility through exchange rate pegging The Economic Journal, 107, (442), pp. 687-694. (doi:10.1111/1468-0297.00184).

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

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Date deposited: 20 Dec 2006
Last modified: 17 Jul 2017 15:52

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Author: Berthold Herrendorf

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