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Partisan and Electoral Motivations and the Choice of Monetary Institutions Under Fully Mobile Capital

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Author Info
William Roberts Clark
Abstract

Central bank independence and pegged exchange rates have each been viewed as solutions to the inflationary bias resulting from the time inconsistency of discretionary monetary policy. While it is obvious that a benevolent social planner would opt for such an institutional solution, it is less obvious that a real-world incumbent facing short-term partisan or electoral pressures would do so. In this article, I model the choice of monetary institutions from the standpoint of a survival-maximizing incumbent. It turns out that a wide range of survival-maximizing incumbents do best by forfeiting control over monetary policy. While political pressures do not, in general, discourage monetary commitments, they can influence the choice between fixed exchange rates and central bank independence. I highlight the importance of viewing fiscal policy and monetary policy as substitutes and identify the conditions under which survival-maximizing incumbents will view fixed exchange rates and central bank independence as substitutes. In so doing, I provide a framework for integrating other contributions to this volume. © 2001 The IO Foundation and the Massachusetts Institute of Technology

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Article provided by MIT Press in its journal International Organization.

Volume (Year): 56 (2002)
Issue (Month): 4 (October)
Pages: 725-749
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Handle: RePEc:tpr:intorg:v:56:y:2002:i:4:p:725-749

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  1. Thomas Plümper and Eric Neumayer, 2008. "Exchange Rate Regime Choice with Multiple Key Currencies," The Institute for International Integration Studies Discussion Paper Series iiisdp264, IIIS. [Downloadable!]
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