Credibility of Policies Versus Credibility of Policymakers
May 1, 1994
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Summary
Standard models of policy credibility, defined as the expectation that an announced policy will be carried out, emphasize the preferences of the policymaker, and the role of tough policies in signalling toughness and raising credibility. Whether a policy is carried out, however, will also reflect the state of the economy. We present a model in which a policymaker maintains a fixed parity in good times, but devalues if the unemployment rate gets too high. Our main conclusion is that if there is persistence in unemployment, observing a tough policy in a given period may lower rather than raise the credibility of a no-devaluation pledge in subsequent periods. We test this implication on data for the interest rate differential between France and Germany and find support for our hypothesis.
Subject: Inflation, Labor, Prices, Unemployment, Unemployment rate
Keywords: anti-inflationary policies increase, critical value, expansionary policy, government debt accumulation, Inflation, no-devaluation rule, objective function, policy convergence, policy credibility, policy instrument, policy stance, second period problem, tough government, Unemployment, Unemployment rate, WP
Pages:
28
Volume:
1994
DOI:
Issue:
049
Series:
Working Paper No. 1994/049
Stock No:
WPIEA0491994
ISBN:
9781451971811
ISSN:
1018-5941
