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- Title
Credibility of policies versus credibility of policymakers.
- Authors
Drazen, Allan; Masson, Paul R.
- Abstract
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 signaling 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 EMS interest rates and find support for our hypothesis.
- Subjects
ECONOMIC policy; POLICY sciences; TRUTHFULNESS &; falsehood; ECONOMIC models; DECISION making; UNEMPLOYMENT; STANDARDS; MONETARY systems; INTEREST rates
- Publication
Quarterly Journal of Economics, 1994, Vol 109, Issue 3, p735
- ISSN
0033-5533
- Publication type
Article
- DOI
10.2307/2118420