UNSPECIFIED. (1997) Importing credibility through exchange rate pegging. ECONOMIC JOURNAL, 107 (442). pp. 687-694. ISSN 0013-0133

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Abstract

This paper employs an optimal taxation framework in order to study the credibility of monetary policy-making in an open economy. Since inflation is, in part, uncontrollable due to stochastic disturbances, the authority's actions cannot be monitored perfectly when the exchange rate floats, thus implying that reputational forces may become ineffective. In contrast, pegging the nominal exchange rate to a low-inflation currency allows perfect monitoring, because the exchange rate is, in principle, controllable. For this reason, exchange rate pegging may import credibility and result in the best reputational equilibrium, even though the authority retains the discretion to devalue unexpectedly.

Item Type:	Journal Article
Subjects:	H Social Sciences > HC Economic History and Conditions
Journal or Publication Title:	ECONOMIC JOURNAL
Publisher:	BLACKWELL PUBL LTD
ISSN:	0013-0133
Date:	May 1997
Volume:	107
Number:	442
Number of Pages:	8
Page Range:	pp. 687-694
Publication Status:	Published
URI:	http://wrap.warwick.ac.uk/id/eprint/17766

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