Visibility and Credibility in the Political Economy of Reform
We investigate the interplay between government credibility and the visibility of policy-making, using the choice of a nominal anchor as an important example of how governments control visibility. We show that visibility has an important influence on how governments acquire credibility, and for this reason is a variable that governments use strategically. Policy-makers with stronger commitment to reform opt for more visible policies (e.g., an exchange-rate anchor) whereas policy-makers who cannot carry through with serious reform opt for noisier signals (e.g., a money anchor). Our logic is that greater visibility makes it easier for the public to learn the government's preferences, and only policy- makers committed to reform want this to happen. Among other things, our analysis provides a rationale for the prevalence of temporary exchange-rate targets in inflation-stabilization programs.
|Date of creation:||01 Jan 1997|
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