Bad Dreams Under Alternative Anchors: Are the Consequences Different?

Author/Editor:

Leonardo Auernheimer ; Susan M George

Publication Date:

January 1, 2000

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

Using a simple model, this paper shows how a strict monetary rule exhibits characteristics similar to those of an exchange rate anchor, in terms of a lack of robustness in the presence of adverse expectations (“bad dreams”). More specifically, as an anticipated devaluation under an exchange rate rule leads to well-known contractionary effects, an anticipated increase in the money stock under a monetary rule, though initially expansionary, becomes contractionary when these expectations are not validated. This suggests that much of the criticism of an exchange rate anchor implicitly considers not another rule but rather, discretion as the alternative.

Series:

Working Paper No. 2000/020

Subject:

Exchange rate adjustments Exchange rates Monetary base Real exchange rates Real interest rates

English

Publication Date:

January 1, 2000

ISBN/ISSN:

9781451843835/1018-5941

Stock No:

WPIEA0202000

Pages:

23

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