TY - JOUR
T1 - Transparency, reputation, and credibility under floating and pegged exchange rates
AU - Herrendorf, Berthold
N1 - Funding Information:
This paper is based on chapter 3 of my PhD thesis at European University Institute. Financial support from the European Investment Bank is gratefully acknowledged. I am especially indebted to Alberto Giovannini for providing the original stimulus behind it. For their support and suggestions, I would like to thank my advisor Mark Salmon and the members of my thesis committee, Michael Artis, Matthew Canzoneri, John Driffill, and Manfred J.M. Neumann. Furthermore, the paper has been improved considerably by suggestions of several referees and an editor of this journal, Robert Cumby. Finally, I have benefitted from comments of and discussions with Luisa Affuso, Kristina Kostial, Maurice Obstfeld, Matthew Rabin, Mark Rhodes, Ákos Valentinyi, Jens Weidmann, and the audiences at presentations during 1995 at the EEA Congress, European University Institute, Colloquia on Economic Research, the Konstanz Seminar on Monetary Theory and Policy, and Nova Lisboa.
PY - 1999/10
Y1 - 1999/10
N2 - This paper shows that if the cost of importing foreign inflation and real exchange rate shocks are not too high, then the equilibrium nominal exchange rate regime for a country with a credibility problem is a peg, under which credibility is higher and inflation is lower than under a float. This holds true although devaluations of the pegged rate are assumed to be costless. The reason is that as realized inflation is not perfectly controllable, planned inflation under a float is private information. In contrast, since the exchange rate can be perfectly controlled, pegging resolves the private information problem, is more transparent, and makes reputation more effective.
AB - This paper shows that if the cost of importing foreign inflation and real exchange rate shocks are not too high, then the equilibrium nominal exchange rate regime for a country with a credibility problem is a peg, under which credibility is higher and inflation is lower than under a float. This holds true although devaluations of the pegged rate are assumed to be costless. The reason is that as realized inflation is not perfectly controllable, planned inflation under a float is private information. In contrast, since the exchange rate can be perfectly controlled, pegging resolves the private information problem, is more transparent, and makes reputation more effective.
KW - Credibility
KW - Exchange rate regime choice
KW - Private information
KW - Reputation
KW - Transparency
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U2 - 10.1016/S0022-1996(98)00060-9
DO - 10.1016/S0022-1996(98)00060-9
M3 - Article
AN - SCOPUS:0032703849
SN - 0022-1996
VL - 49
SP - 31
EP - 50
JO - Journal of International Economics
JF - Journal of International Economics
IS - 1
ER -