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Credibility of Policies Versus Credibility of Policymakers

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  • Allan Drazen
  • Paul R. Masson

Abstract

Standard models of policy credibility, defined as the expectation that an announced policy will be carried out, emphasize the preferences of the policymaker and the role of tough policies in signaling toughness and raising credibility. Whether a policy is carried out, however, will also reflect the state of the economy. We present a model in which a policymaker maintains a fixed parity in good times, but devalues if the unemplo3nnent rate gets too high. Our main conclusion is that if there is persistence in unemplo3n3ient, observing a tough policy in a given period may lower rather than raise the credibility of a no-devaluation pledge in subsequent periods. We test this implication on EMS interest rates and find support for our hypothesis.

Suggested Citation

  • Allan Drazen & Paul R. Masson, 1994. "Credibility of Policies Versus Credibility of Policymakers," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(3), pages 735-754.
    • Handle: RePEc:oup:qjecon:v:109:y:1994:i:3:p:735-754.
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    JEL classification:

    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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