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Credibility and Stabilization


  • Dornbusch, Rudiger


When governments attempt stabilization why do they not undertake a programme certain to succeed? The paper discusses credibility when it is inconceivable that a programme will succeed with probability one. A cost-benefit analysis establishes an equilibrium programme that has some ex ante probability of failure, so that credibility is always less than full. The context is a one-shot game in which policy-makers are uncertain about the response of the instruments or the post-stabilization economic environment. As a positive theory of stabilization, the paper identifies the factors that increase the chances of success of a programme.

Suggested Citation

  • Dornbusch, Rudiger, 1990. "Credibility and Stabilization," CEPR Discussion Papers 454, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:454

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    References listed on IDEAS

    1. Cohen, Daniel & Wyplosz, Charles, 1989. "The European Monetary Union: An Agnostic Evaluation," CEPR Discussion Papers 306, C.E.P.R. Discussion Papers.
    2. Jeffrey Sachs, 1983. "International Policy Coordination in a Dynamic Macroeconomic Model," NBER Working Papers 1166, National Bureau of Economic Research, Inc.
    3. Marcus Miller & Mark Salmon, 1985. "Policy Coordination and Dynamic Games," NBER Chapters,in: International Economic Policy Coordination, pages 184-227 National Bureau of Economic Research, Inc.
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    Credibility; Stabilization;


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