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The Disadvantage of Tying Their Hands: On the Political Economy of Policy Commitments

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  • Milesi-Ferretti, Gian Maria

Abstract

In order to increase their electoral chances, incumbents may forego policy measures that improve the relative standing of their opponents in the eyes of voters. This paper illustrates the point by focusing on the choice between fixed and floating exchange rates. An inflation-averse government may refrain from choosing fixed exchange rates in order to capitalize on the 'inflationary' reputation of its opponent. This incentive is contrasted with the opposite incentive to 'tie the hands' of its opponent should the latter win the election. For a more inflationary government, electoral considerations reinforce the incentive to 'tie its own hands' with fixed exchange rates. Copyright 1995 by Royal Economic Society.

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Bibliographic Info

Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 105 (1995)
Issue (Month): 433 (November)
Pages: 1381-1402

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Handle: RePEc:ecj:econjl:v:105:y:1995:i:433:p:1381-1402

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Cited by:
  1. James A. Robinson & Ragnar Torvik, 2005. "A Political Economy Theory of the Soft Budget Constraint," Working Paper Series 5605, Department of Economics, Norwegian University of Science and Technology.
  2. Carlos Scartascini & Mariano Tommasi & Ernesto Stein, 2010. "Veto Players and Policy Trade-Offs- An Intertemporal Approach to Study the Effects of Political Institutions on Policy," Research Department Publications 4660, Inter-American Development Bank, Research Department.
  3. McBride, Michael, 2005. "Crises, reforms, and regime persistence in sub-Saharan Africa," European Journal of Political Economy, Elsevier, vol. 21(3), pages 688-707, September.
  4. Pierre-Guillaume Méon & Geoffrey Minne, 2011. "Mark my Words: Information and the Fear of Declaring one’s Exchange Rate Regime," Working Papers CEB 11-040, ULB -- Universite Libre de Bruxelles.
  5. Ralph Setzer, 2005. "The Political Economy of Fixed Exchange Rates: A Survival Analysis," Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim 265/2005, Department of Economics, University of Hohenheim, Germany.
  6. Berdiev, Aziz N. & Kim, Yoonbai & Chang, Chun Ping, 2012. "The political economy of exchange rate regimes in developed and developing countries," European Journal of Political Economy, Elsevier, vol. 28(1), pages 38-53.
  7. Bodea, Cristina, 2010. "The political economy of fixed exchange rate regimes: The experience of post-communist countries," European Journal of Political Economy, Elsevier, vol. 26(2), pages 248-264, June.
  8. Uhlig, Harald, 1997. "Long Term Debt and the Political Support of a Monetary Union," CEPR Discussion Papers 1603, C.E.P.R. Discussion Papers.
  9. Sutter, Matthias, 2003. " The Political Economy of Fiscal Policy: An Experimental Study on the Strategic Use of Deficits," Public Choice, Springer, vol. 116(3-4), pages 313-32, September.
  10. Cermeño, Rodolfo & Grier, Robin & Grier, Kevin, 2010. "Elections, exchange rates and reform in Latin America," Journal of Development Economics, Elsevier, vol. 92(2), pages 166-174, July.
  11. F. Andrew Hanssen, 2004. "Is There a Politically Optimal Level of Judicial Independence?," American Economic Review, American Economic Association, vol. 94(3), pages 712-729, June.
  12. Jonsson, Gunnar, 1997. "Monetary politics and unemployment persistence," Journal of Monetary Economics, Elsevier, vol. 39(2), pages 303-325, July.

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