The University of Southampton
University of Southampton Institutional Repository

Importing credibility through exchange rate pegging

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.
0013-0133
687-694
Herrendorf, Berthold
3cf68f14-808a-42a7-9642-85b757775096
Herrendorf, Berthold
3cf68f14-808a-42a7-9642-85b757775096

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

Record type: Article

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

Atom RSS 1.0 RSS 2.0

Contact ePrints Soton: eprints@soton.ac.uk

ePrints Soton supports OAI 2.0 with a base URL of http://eprints.soton.ac.uk/cgi/oai2

This repository has been built using EPrints software, developed at the University of Southampton, but available to everyone to use.

We use cookies to ensure that we give you the best experience on our website. If you continue without changing your settings, we will assume that you are happy to receive cookies on the University of Southampton website.

×