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Policy-Delegation and Fixed Exchange Rates

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  • von Hagen, Jurgen

Abstract

Recent literature interpreting the European Monetary System emphasizes credibility gains from delegating monetary policy to a low-inflation country through fixed exchange rates. This paper presents a model of an exchange rate system as a device for policy delegation in the context of a repeated monetary policy game. In contrast to single-shot games, it generates credibility gains for the high-inflation and low-inflation countries in the system. Credibility gains neither require nor imply hegemony of the low-inflation member. Stochastic realignments enable the members to adopt different inflation trends without destroying the credibility benefits from policy delegation. Copyright 1992 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

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Bibliographic Info

Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

Volume (Year): 33 (1992)
Issue (Month): 4 (November)
Pages: 849-70

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Handle: RePEc:ier:iecrev:v:33:y:1992:i:4:p:849-70

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Cited by:
  1. J.M.C. Santos Silva & Silvana Tenreyro, 2010. "Currency unions in prospect and retrospect," LSE Research Online Documents on Economics 28738, London School of Economics and Political Science, LSE Library.
  2. Bensaid, Bernard & Jeanne, Olivier, 1997. "The instability of fixed exchange rate systems when raising the nominal interest rate is costly," European Economic Review, Elsevier, vol. 41(8), pages 1461-1478, August.
  3. Jürgen von Hagen & Jizhong Zhou, 2005. "The choice of exchange rate regime: "An empirical analysis for transition economies" ," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 13(4), pages 679-703, October.
  4. Olivier Jeanne & Bernard Bensaïd, 1996. "Fragilité des systèmes de change fixe et contrôle des capitaux," Économie et Prévision, Programme National Persée, vol. 123(2), pages 163-174.
  5. Aubert, Ludovic & Laskar, Daniel, 1999. "Private information : an argument for a fixed exchange rate system," CEPREMAP Working Papers (Couverture Orange) 9903, CEPREMAP.

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