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Credibility and Changes in Policy Regime

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  • Ruge-Murcia, Francisco J

Abstract

This paper develops a rational expectations model of inflation in which the dynamics are driven by government expenditure and the effect of past inflation rates on the value of real taxes. Government spending follows an autoregressive process subject to discrete regime changes. The regimes are defined by whether the expenditure level is consistent with the rate of inflation targeted by the government. The agents do not observe the regime but construct probability inferences using data on inflation, interest rates, and spending. Credibility is quantified by the agents' inferred probability that the variables are in effect generated by the reformed regime. Copyright 1995 by University of Chicago Press.

Suggested Citation

  • Ruge-Murcia, Francisco J, 1995. "Credibility and Changes in Policy Regime," Journal of Political Economy, University of Chicago Press, vol. 103(1), pages 176-208, February.
  • Handle: RePEc:ucp:jpolec:v:103:y:1995:i:1:p:176-208
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    References listed on IDEAS

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    1. Kiguel, Miguel A, 1989. "Budget Deficits, Stability, and the Monetary Dynamics of Hyperinflation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 21(2), pages 148-157, May.
    2. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, pages 101-121.
    3. Rudiger Dornbusch & Stanley Fischer, 1986. "Stopping hyperinflations past and present," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), pages 1-47.
    4. Salemi, Michael K & Sargent, Thomas J, 1979. "The Demand for Money during Hyperinflation under Rational Expectations: II," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 20(3), pages 741-758, October.
    5. Sargent, Thomas J & Wallace, Neil, 1973. "Rational Expectations and the Dynamics of Hyperinflation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 14(2), pages 328-350, June.
    6. Barro, Robert J, 1970. "Inflation, the Payments Period, and the Demand for Money," Journal of Political Economy, University of Chicago Press, pages 1228-1263.
    7. Frenkel, Jacob A, 1977. "The Forward Exchange Rate, Expectations, and the Demand for Money: The German Hyperinflation," American Economic Review, American Economic Association, pages 653-670.
    8. LaHaye, Laura, 1985. "Inflation and Currency Reform," Journal of Political Economy, University of Chicago Press, pages 537-560.
    9. Davidson, Russell & MacKinnon, James G., 1993. "Estimation and Inference in Econometrics," OUP Catalogue, Oxford University Press, number 9780195060119.
    10. Flood, Robert P & Garber, Peter M, 1980. "An Economic Theory of Monetary Reform," Journal of Political Economy, University of Chicago Press, pages 24-58.
    11. Emmanuel Farhi & Iván Werning, 2007. "Inequality and Social Discounting," Journal of Political Economy, University of Chicago Press, vol. 115, pages 365-402.
    12. David Backus & John Driffill, 1985. "Rational Expectations and Policy Credibility Following a Change in Regime," Review of Economic Studies, Oxford University Press, vol. 52(2), pages 211-221.
    13. Rudiger Dornbusch & Stanley Fischer, 1986. "Stopping hyperinflations past and present," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), pages 1-47.
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