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Visibility and Credibility in the Political Economy of Reform

  • Chris Canavan

    (Boston College)

  • Mariano Tommasi

    (UCLA and Universidad de San Andres)

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.

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File URL: http://fmwww.bc.edu/EC-P/wp346.pdf
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Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 346..

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Length: 32 pages
Date of creation: 01 Jan 1997
Date of revision:
Handle: RePEc:boc:bocoec:346
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Web page: http://fmwww.bc.edu/EC/
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  1. Vickers, John, 1986. "Signalling in a Model of Monetary Policy with Incomplete Information," Oxford Economic Papers, Oxford University Press, vol. 38(3), pages 443-55, November.
  2. Agenor, Pierre-Richard, 1994. "Credibility and exchange rate management in developing countries," Journal of Development Economics, Elsevier, vol. 45(1), pages 1-16, October.
  3. Peter Montiel & Bijan B. Aghevli & Mohsin S. Khan, 1991. "Exchange Rate Policy in Developing Countries; Some Analytical Issues," IMF Occasional Papers 78, International Monetary Fund.
  4. Guillermo A. Calvo & Carlos A. Végh, 1994. "Inflation Stabilization And Nominal Anchors," Contemporary Economic Policy, Western Economic Association International, vol. 12(2), pages 35-45, 04.
  5. Shantayanan Devarajan & Dani Rodrik, 1991. "Do the Benefits of Fixed Exchange Rates Outweigh Their Costs? The Franc Zone in Africa," NBER Working Papers 3727, National Bureau of Economic Research, Inc.
  6. Thomas J. Sargent, 1981. "The ends of four big inflations," Working Papers 158, Federal Reserve Bank of Minneapolis.
  7. Tornell, Aaron & Velasco, Andres, 1995. "Money-Based Versus Exchange Rate-Based Stabilization with Endogenous Fiscal Policy," Working Papers 95-21, C.V. Starr Center for Applied Economics, New York University.
  8. Carlos A. Végh Gramont, 1991. "Stopping High Inflation; An Analytical Overview," IMF Working Papers 91/107, International Monetary Fund.
  9. Carlos A. Végh, 1992. "Stopping High Inflation: An Analytical Overview," IMF Staff Papers, Palgrave Macmillan, vol. 39(3), pages 626-695, September.
  10. Cukierman, Alex & Liviatan, Nissan, 1991. "Optimal accommodation by strong policymakers under incomplete information," Journal of Monetary Economics, Elsevier, vol. 27(1), pages 99-127, February.
  11. Cukierman, Alex & Meltzer, Allan H, 1986. "A Theory of Ambiguity, Credibility, and Inflation under Discretion and Asymmetric Information," Econometrica, Econometric Society, vol. 54(5), pages 1099-1128, September.
  12. Rudiger Dornbusch & Mario Henrique Simonsen, 1987. "Inflation Stabilization with Incomes Policy Support: A Review of the Experience in Argentina, Brazil and Israel," NBER Working Papers 2153, National Bureau of Economic Research, Inc.
  13. Paul R. Masson & Morris Goldstein & Jacob A. Frenkel, 1991. "Characteristics of a Successful Exchange Rate System," IMF Occasional Papers 82, International Monetary Fund.
  14. Giavazzi, Francesco & Pagano, Marco, 1986. "The Advantages of Tying One's Hands: EMS Discipline and Central Bank Credibility," CEPR Discussion Papers 135, C.E.P.R. Discussion Papers.
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