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The Disadvantage of Tying Their Hands: On the Political Economy of Policy Commitments

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  • Milesi-Ferretti, Gian Maria

Abstract

In order to increase their electoral chances, incumbents may forego policy measures that improve the relative standing of their opponents in the eyes of voters. This paper illustrates the point by focusing on the choice between fixed and floating exchange rates. An inflation-averse government may refrain from choosing fixed exchange rates in order to capitalize on the 'inflationary' reputation of its opponent. This incentive is contrasted with the opposite incentive to 'tie the hands' of its opponent should the latter win the election. For a more inflationary government, electoral considerations reinforce the incentive to 'tie its own hands' with fixed exchange rates. Copyright 1995 by Royal Economic Society.

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  • Milesi-Ferretti, Gian Maria, 1995. "The Disadvantage of Tying Their Hands: On the Political Economy of Policy Commitments," Economic Journal, Royal Economic Society, vol. 105(433), pages 1381-1402, November.
  • Handle: RePEc:ecj:econjl:v:105:y:1995:i:433:p:1381-1402
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    1. Masciandaro, Donato & Romelli, Davide, 2015. "Ups and downs of central bank independence from the Great Inflation to the Great Recession: theory, institutions and empirics," Financial History Review, Cambridge University Press, vol. 22(03), pages 259-289, December.
    2. Gilles Saint‐Paul & Davide Ticchi & Andrea Vindigni, 2016. "A Theory of Political Entrenchment," Economic Journal, Royal Economic Society, vol. 126(593), pages 1238-1263, June.
    3. Donato Masciandaro & Davide Romelli, 2015. "Ups and Downs. Central Bank Independence from the Great Inflation to the Great Recession: Theory, Institutions and Empirics," BAFFI CAREFIN Working Papers 1503, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    4. Carlos Scartascini & Mariano Tommasi & Ernesto Stein, 2010. "Veto Players and Policy Trade-Offs- An Intertemporal Approach to Study the Effects of Political Institutions on Policy," Research Department Publications 4660, Inter-American Development Bank, Research Department.
    5. Ralph Setzer, 2005. "The Political Economy of Fixed Exchange Rates: A Survival Analysis," Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim 265/2005, Department of Economics, University of Hohenheim, Germany.
    6. Robinson, James A. & Torvik, Ragnar, 2009. "A political economy theory of the soft budget constraint," European Economic Review, Elsevier, vol. 53(7), pages 786-798, October.
    7. Méon, Pierre-Guillaume & Minne, Geoffrey, 2014. "Mark my words: Information and the fear of declaring an exchange rate regime," Journal of Development Economics, Elsevier, vol. 107(C), pages 244-261.
    8. Cermeño, Rodolfo & Grier, Robin & Grier, Kevin, 2010. "Elections, exchange rates and reform in Latin America," Journal of Development Economics, Elsevier, vol. 92(2), pages 166-174, July.
    9. Sutter, Matthias, 2003. "The Political Economy of Fiscal Policy: An Experimental Study on the Strategic Use of Deficits," Public Choice, Springer, vol. 116(3-4), pages 313-332, September.
    10. McBride, Michael, 2005. "Crises, reforms, and regime persistence in sub-Saharan Africa," European Journal of Political Economy, Elsevier, vol. 21(3), pages 688-707, September.
    11. F. Andrew Hanssen, 2004. "Is There a Politically Optimal Level of Judicial Independence?," American Economic Review, American Economic Association, vol. 94(3), pages 712-729, June.
    12. Gilles Saint-Paul & Davide Ticchi & Andrea Vindigni, 2017. "Engineering Crises: Favoritism and Strategic Fiscal Indiscipline," PSE Working Papers halshs-01584043, HAL.
    13. Bodea, Cristina, 2010. "The political economy of fixed exchange rate regimes: The experience of post-communist countries," European Journal of Political Economy, Elsevier, vol. 26(2), pages 248-264, June.
    14. Berdiev, Aziz N. & Kim, Yoonbai & Chang, Chun Ping, 2012. "The political economy of exchange rate regimes in developed and developing countries," European Journal of Political Economy, Elsevier, vol. 28(1), pages 38-53.
    15. Bodea, Cristina, 2015. "Fixed exchange rates with escape clauses: The political determinants of the European Monetary System realignments," European Journal of Political Economy, Elsevier, vol. 39(C), pages 25-40.
    16. Jonsson, Gunnar, 1997. "Monetary politics and unemployment persistence," Journal of Monetary Economics, Elsevier, vol. 39(2), pages 303-325, July.

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