The Advantages of Tying One's Hands: EMS Discipline and Central Bank Credibility
AbstractIt is often argued that the EMS is an effective disciplinary device for inflation-prone countries in the EEC, since it forces policy-makers in these countries to pursue more restrictive monetary policies than they would otherwise. It is not clear, however, why these countries should submit themselves to such discipline. This paper argues that in order to answer this question appropriately, one must consider that EMS membership brings potentially large credibility gains to policy-makers in high-inflation countries: the reason is that not only it attaches an extra penalty to inflation (in terms of competitiveness losses), but makes the public aware that the policy-maker is faced with such penalty, and thus helps to overcome the inefficiency stemming from the public's mistrust for the authorities. We study the conditions under which these credibility gains are larger than the penalties that the policy-maker incurs in equilibrium. When policy-makers attach no value to inflationary finance, we find that they will always prefer EMS membership. When the policy-maker needs revenue from the inflation tax, however this conclusion is not always true. The opposite contention, that EMS membership is an inferior regime for any government that needs inflationary finance is also generally incorrect. The outcome of the welfare comparison depends (i) on the value placed by the policy-maker on seigniorage relative to the discounted output cost of inflation, and (ii) on the tightness of EMS discipline, as measured by the time interval between realignments and by the portion of lost competitiveness that the country is not allowed to recover at realignments.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 135.
Date of creation: Oct 1986
Date of revision:
Contact details of provider:
Postal: Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820
Other versions of this item:
- Francesco Giavazzi & Marco Pagano, 1991. "The Advantage of Tying One's Hands: EMS Discipline and Central Bank Credibility," NBER Chapters, in: International Volatility and Economic Growth: The First Ten Years of The International Seminar on Macroeconomics, pages 303-330 National Bureau of Economic Research, Inc.
- Giavazzi, Francesco & Pagano, Marco, 1988. "The advantage of tying one's hands : EMS discipline and Central Bank credibility," European Economic Review, Elsevier, vol. 32(5), pages 1055-1075, June.
You can help add them by filling out this form.
Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- 1992: le "lievi imprecisioni" del Corsera
by Alberto Bagnai in Goofynomics on 2012-05-21 13:41:00
- Mehr Europa: Du mußt es dreimal sagen
by Alberto Bagnai in Goofynomics on 2012-06-03 22:07:00
- Repubblica e il vincolismo
by Alberto Bagnai in Goofynomics on 2012-06-16 20:49:00
- Quelli che: nel 1992 i tassi schizzarono alle stelle
by Alberto Bagnai in Il Fatto Quotidiano on 2012-09-10 14:22:08
- Declino, produttivitÃ , flessibilitÃ , euro: il mio primo maggio.
by Alberto Bagnai in Goofynomics on 2013-05-01 20:31:00
- Le aporie del più Europa
by Alberto Bagnai in Goofynomics on 2012-08-05 15:59:00
- Scene dalla vita di provincia: prefazione
by Alberto Bagnai in Goofynomics on 2013-06-27 08:04:00
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page. reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.