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Credibility and Commitment of Monetary Policy in Open Economies

In this paper we study the delegation of monetary policy to independent central bankers in a two country world with monetary spill-overs. The paper shows that under imperfect commitment and private information of the Central Bankers about their objectives the optimal degree of commitment depends on the correlation structure of the shock hitting the economies. When the correlation of the shocks across countries is negative, as when the variance to output depends mainly on shocks to the terms of trade, there exist strategic complementarity in the optimal degree of commitment. When the correlation of shocks is positive (common technological or demand shocks) there exist strategic substitutability. These result may provide rationale for the simultaneous increasing attention to the institutional solution to the credibility problem in monetary policy in most advanced countries in the last decades.

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Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 47.

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Date of creation: 01 Sep 2000
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Publication status: Published in European Journal of Political Economy, 2003, vol. 21, pages 872-902
Handle: RePEc:sef:csefwp:47
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  1. Maurice Obstfeld & Kenneth Rogoff, 1999. "New Directions for Stochastic Open Economy Models," NBER Working Papers 7313, National Bureau of Economic Research, Inc.
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  30. Marta Campillo & Jeffrey A. Miron, 1996. "Why Does Inflation Differ Across Countries?," NBER Working Papers 5540, National Bureau of Economic Research, Inc.
  31. Adam S. Posen, 1995. "Declarations Are Not Enough: Financial Sector Sources of Central Bank Independence," NBER Chapters, in: NBER Macroeconomics Annual 1995, Volume 10, pages 253-274 National Bureau of Economic Research, Inc.
  32. Muscatelli, Anton, 1998. "Optimal Inflation Contracts and Inflation Targets with Uncertain Central Bank Preferences: Accountability through Independence?," Economic Journal, Royal Economic Society, vol. 108(447), pages 529-42, March.
  33. Corsetti, Giancarlo & Pesenti, Paolo & Roubini, Nouriel & Tille, Cedric, 2000. "Competitive devaluations: toward a welfare-based approach," Journal of International Economics, Elsevier, vol. 51(1), pages 217-241, June.
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