Importing credibility through exchange rate pegging

Herrendorf, Berthold (1997) Importing credibility through exchange rate pegging The Economic Journal, 107, (442), pp. 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.

Item Type: Article
Digital Object Identifier (DOI): doi:10.1111/1468-0297.00184
ISSNs: 0013-0133 (print)
ePrint ID: 33451
Date :
Date Event
Date Deposited: 20 Dec 2006
Last Modified: 16 Apr 2017 22:15
Further Information:Google Scholar

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