Autore
HERRENDORF, Berthold

Titolo
Credible purchases of credibility through exchange rate pegging: an optimal taxation framework
Periodico
European University Institute of Badia Fiesolana (Fi). Department of Economics - Working papers
Anno: 1994 - Fascicolo: 38 - Pagina iniziale: 1 - Pagina finale: 35

We consider the time consistency problem of monetary policy in an open economy when inflation is in part uncontrollable due to stochastic disturbances. If these disturbances are private information of the government, individuals cannot discover whether the government is responsible for realized inflation surprises. As is standard this leads to an inflationary bias in a reputational equilibrium when inflation is targeted. We show that pegging the exchange rate eliminates this bias if the foreign authority is precommited. However, since generally the foreign inflation rate is domestically suboptimal, only a properly designed crawling peg is guaranteed of improving welfare.



Testo completo: http://hdl.handle.net/1814/517

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