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Checks and balances, private information, and the credibility of monetary commitments

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  • Keefer, Philip
  • Stasavage, David

Abstract

The authors develop and test several new hypotheses about the anti-inflationary effect of central bank independence and exchange rate pegs in the context of different institutions and different degrees of citizen information about government policies. Theory provides strong reason to believe that while central bank independence will prove more effective as a commitment mechanism in countries where multiple players in government have veto power (checks and balances), the number of veto players will have no effect on the credibility of exchange rate pegs. Conversely, the authors argue that central bank independence does not solve the problems of commitment that arise when citizens are imperfectly informed about the contribution of government policy to inflation. Exchange rate pegs, however, mitigate these problems. The authors present extensive evidence from cross-country tests using newly developed data thatprovide strong support for their propositions.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2542.

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Date of creation: 28 Feb 2001
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Handle: RePEc:wbk:wbrwps:2542

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Keywords: Economic Stabilization; Economic Theory&Research; Macroeconomic Management; Environmental Economics&Policies; Financial Intermediation;

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  1. Robert J. Barro & David B. Gordon, 1981. "A Positive Theory of Monetary Policy in a Natural-Rate Model," NBER Working Papers 0807, National Bureau of Economic Research, Inc.
  2. Obstfeld, Maurice, 1996. "Models of currency crises with self-fulfilling features," European Economic Review, Elsevier, Elsevier, vol. 40(3-5), pages 1037-1047, April.
  3. Romer, David, 1993. "Openness and Inflation: Theory and Evidence," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 108(4), pages 869-903, November.
  4. Canzoneri, Matthew B, 1985. "Monetary Policy Games and the Role of Private Information," American Economic Review, American Economic Association, American Economic Association, vol. 75(5), pages 1056-70, December.
  5. Herrendorf, Berthold, 1999. "Transparency, reputation, and credibility under floating and pegged exchange rates," Journal of International Economics, Elsevier, Elsevier, vol. 49(1), pages 31-50, October.
  6. Weingast, Barry R & Moran, Mark J, 1983. "Bureaucratic Discretion or Congressional Control? Regulatory Policymaking by the Federal Trade Commission," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 91(5), pages 765-800, October.
  7. Atish R. Ghosh & Anne-Marie Gulde & Jonathan D. Ostry & Holger C. Wolf, 1997. "Does The Nominal Exchange Rate Regime Matter?," Working Papers, New York University, Leonard N. Stern School of Business, Department of Economics 97-09, New York University, Leonard N. Stern School of Business, Department of Economics.
  8. Faust, J. & Svensson, L.E.O., 1998. "Transparency and Credibility: Monetary Policy with Unobservable Goals," Papers, Stockholm - International Economic Studies 636, Stockholm - International Economic Studies.
  9. Marta Campillo & Jeffrey A. Miron, 1997. "Why Does Inflation Differ across Countries?," NBER Chapters, in: Reducing Inflation: Motivation and Strategy, pages 335-362 National Bureau of Economic Research, Inc.
  10. Cukierman, Alex & Miller, Geoffrey & Neyapti, Bilin, 2001. "Central Bank Reform, Liberalization and Inflation in Transition Economies - An International Perspective," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2808, C.E.P.R. Discussion Papers.
  11. Backus, David & Driffill, John, 1985. "Rational Expectations and Policy Credibility Following a Change in Regime," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 52(2), pages 211-21, April.
  12. Barro, Robert J., 1986. "Reputation in a model of monetary policy with incomplete information," Journal of Monetary Economics, Elsevier, Elsevier, vol. 17(1), pages 3-20, January.
  13. Canavan, Chris & Tommasi, Mariano, 1997. "On the credibility of alternative exchange rate regimes," Journal of Development Economics, Elsevier, Elsevier, vol. 54(1), pages 101-122, October.
  14. Cukierman, Alex & Webb, Steven B & Neyapti, Bilin, 1992. "Measuring the Independence of Central Banks and Its Effect on Policy Outcomes," World Bank Economic Review, World Bank Group, World Bank Group, vol. 6(3), pages 353-98, September.
  15. Moser, Peter, 1999. "Checks and balances, and the supply of central bank independence," European Economic Review, Elsevier, Elsevier, vol. 43(8), pages 1569-1593, August.
  16. Davidson, Russell & MacKinnon, James G, 1981. "Several Tests for Model Specification in the Presence of Alternative Hypotheses," Econometrica, Econometric Society, Econometric Society, vol. 49(3), pages 781-93, May.
  17. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 85(3), pages 473-91, June.
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Citations

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Cited by:
  1. 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, Elsevier, vol. 32(3), pages 766-781, September.
  2. Dalla Pellegrina, L. & Masciandaro, D. & Pansini, R.V., 2013. "The central banker as prudential supervisor: Does independence matter?," Journal of Financial Stability, Elsevier, Elsevier, vol. 9(3), pages 415-427.
  3. Leonid Polishchuk & Georgiy Syunyaev, 2013. "Ruling elites' rotation and asset ownership: Implications for property rights," HSE Working papers, National Research University Higher School of Economics WP BRP 43/EC/2013, National Research University Higher School of Economics.
  4. 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.
  5. Cristina Bodea, 2013. "Independent central banks, regime type, and fiscal performance: the case of post-communist countries," Public Choice, Springer, Springer, vol. 155(1), pages 81-107, April.
  6. Christian Fahrholz, 2003. "Strategic Exchange-Rate Policy of Accession Countries in ERM II," Eastward Enlargement of the Euro-zone Working Papers, Free University Berlin, Jean Monnet Centre of Excellence wp14, Free University Berlin, Jean Monnet Centre of Excellence, revised 01 Apr 2003.
  7. Down Ian, 2009. "Central Bank Independence, Disinflations and Monetary Policy," Business and Politics, De Gruyter, De Gruyter, vol. 10(3), pages 1-22, January.
  8. 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.
  9. 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, Claremont Colleges 2001-29, Claremont Colleges.

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