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Checks and Balances, Private Information, and the Credibility of Monetary Commitments

  • Keefer, Philip
  • Stasavage, David

In this article, we argue that the effectiveness of central bank independence and exchange-rate pegs in solving credibility problems is contingent on two factors: political institutions and information asymmetries. However, the impact of these two factors differs. We argue that the presence of one institution—multiple political veto players—should be crucial for the effectiveness of central bank independence, but should have no impact on the efficacy of exchange-rate pegs. In contrast, exchange-rate pegs should have a greater anti-inflationary impact when it is difficult for the public to distinguish between inflation generated by policy choice and inflation resulting from exogenous shocks to the economy. Such information asymmetries between the public and the government, however, do not increase the efficacy of central bank independence. Empirical tests using newly developed data on political institutions provide strong support for our hypotheses.

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Article provided by Cambridge University Press in its journal International Organization.

Volume (Year): 56 (2002)
Issue (Month): 04 (September)
Pages: 751-774

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Handle: RePEc:cup:intorg:v:56:y:2002:i:04:p:751-774_44
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  1. Faust, Jon & Svensson, Lars E O, 1998. "Transparency and Credibility: Monetary Policy with Unobservable Goals," CEPR Discussion Papers 1852, C.E.P.R. Discussion Papers.
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  3. Cukierman, Alex & Miller, Geoffrey P. & Neyapti, Bilin, 2002. "Central bank reform, liberalization and inflation in transition economies--an international perspective," Journal of Monetary Economics, Elsevier, vol. 49(2), pages 237-264, March.
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  7. 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, vol. 6(3), pages 353-98, September.
  8. Canavan, Chris & Tommasi, Mariano, 1997. "On the credibility of alternative exchange rate regimes," Journal of Development Economics, Elsevier, vol. 54(1), pages 101-122, October.
  9. Moser, Peter, 1999. "Checks and balances, and the supply of central bank independence," European Economic Review, Elsevier, vol. 43(8), pages 1569-1593, August.
  10. David Romer, 1991. "Openness and inflation: theory and evidence," Proceedings, Federal Reserve Bank of San Francisco, issue Nov.
  11. Matthew B. Canzoneri, 1983. "Monetary policy games and the role of private information," International Finance Discussion Papers 249, Board of Governors of the Federal Reserve System (U.S.).
  12. Robert J. Barro, 1986. "Reputation in a Model of Monetary Policy with Incomplete Information," NBER Working Papers 1794, National Bureau of Economic Research, Inc.
  13. Herrendorf, Berthold, 1999. "Transparency, reputation, and credibility under floating and pegged exchange rates," Journal of International Economics, Elsevier, vol. 49(1), pages 31-50, October.
  14. Russell Davidson & James G. MacKinnon, 1980. "Several Tests for Model Specification in the Presence of Alternative Hypotheses," Working Papers 378, Queen's University, Department of Economics.
  15. Maurice Obstfeld, 1995. "Models of Currency Crises with Self-Fulfilling Features," NBER Working Papers 5285, National Bureau of Economic Research, Inc.
  16. Atish R. Ghosh & Anne-Marie Gulde & Jonathan D. Ostry & Holger C. Wolf, 1997. "Does The Nominal Exchange Rate Regime Matter?," Working Papers 97-09, New York University, Leonard N. Stern School of Business, Department of Economics.
  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, vol. 85(3), pages 473-91, June.
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