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Checks and Balances, Private Information, and the Credibility of Monetary Commitments

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  • Keefer, Philip
  • Stasavage, David

Abstract

Positive models of monetary policy have focused on the fundamentaldif culty that governments can encounter in establishing thecredibility of their policy commitments. After governments haveannounced their monetary policy and the public has taken actions thatrely on that policy, such as signing wage contracts, governments mayhave an incentive to increase the rate of in ation ex post. Twoinformation asymmetries complicate attempts to solve this credibilityproblem. First, the public may have little information about policymakerpreferences and therefore about the incentives of policymakers to renegeon any policy commitments they make. Second, because the public may notbe able to observe policymaker actions, they have more dif cultydetecting whether policymakers have adhered to an announced policy.Considerable research has investigated the use of central bankindependence and exchange-rate pegs as instruments that governmentsmight use to establish policy credibility. In this article, we addresstwo related puzzles that have received less attention in the literature:Why is it more costly for politicians to revoke central bankindependence or xed exchange rates than to abandon more simplecommitments, such as a promise to maintain a speci c rate of in ation?And why does the presence of an independent central bank or a peggedexchange rate deliver more information to the public than simple policyannouncements?

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Bibliographic Info

Article provided by Cambridge University Press in its journal International Organization.

Volume (Year): 56 (2002)
Issue (Month): 04 (September)
Pages: 751-774

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Handle: RePEc:cup:intorg:v:56:y:2002:i:04:p:751-774_44

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Cited by:
  1. Andreas Freytag & Friedrich Schneider, 2007. "Monetary Commitment, Institutional Constraints and Inflation: Empirical Evidence for OECD Countries since the 1970s," Jena Economic Research Papers 2007-002, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics.
  2. Hossain, Monzur, 2009. "Institutional development and the choice of exchange rate regime: A cross-country analysis," Journal of the Japanese and International Economies, Elsevier, vol. 23(1), pages 56-70, March.
  3. Cristina Bodea, 2013. "Independent central banks, regime type, and fiscal performance: the case of post-communist countries," Public Choice, Springer, vol. 155(1), pages 81-107, April.
  4. Thomas D. Willett, 2001. "The Political Economy of External Discipline: Constraint Versus Incentive Effects of Capital Mobility and Exchange Rate Pegs," Claremont Colleges Working Papers 2001-29, Claremont Colleges.
  5. Down Ian, 2009. "Central Bank Independence, Disinflations and Monetary Policy," Business and Politics, De Gruyter, vol. 10(3), pages 1-22, January.
  6. Leonid Polishchuk & Georgiy Syunyaev, 2013. "Ruling elites' rotation and asset ownership: Implications for property rights," HSE Working papers WP BRP 43/EC/2013, National Research University Higher School of Economics.
  7. Christian Fahrholz, 2003. "Strategic Exchange-Rate Policy of Accession Countries in ERM II," Eastward Enlargement of the Euro-zone Working Papers wp14, Free University Berlin, Jean Monnet Centre of Excellence, revised 01 Apr 2003.
  8. Dalla Pellegrina, L. & Masciandaro, D. & Pansini, R.V., 2013. "The central banker as prudential supervisor: Does independence matter?," Journal of Financial Stability, Elsevier, vol. 9(3), pages 415-427.
  9. Dreher, Axel & Sturm, Jan-Egbert & Haan, Jakob de, 2010. "When is a central bank governor replaced? Evidence based on a new data set," Journal of Macroeconomics, Elsevier, vol. 32(3), pages 766-781, September.

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