IMF Working Papers Volume 1994 Issue 049: Credibility of Policies Versus Credibility of Policymakers (1994)

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Credibility of Policies Versus Credibility of Policymakers

Author:

Mr. Paul R Masson

Mr. Paul R Masson
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and

Allan Drazen

Allan Drazennull

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Series:: IMF Working Papers

Volume/Issue:: Volume 1994: Issue 049

Language:: English

Publication Date:: 01 May 1994

DOI:: https://doi.org/10.5089/9781451971811.001

ISBN:: 9781451971811

ISSN:: 1018-5941

Pages:: 28

Keywords:: WP; policy credibility; government debt accumulation; anti-inflationary policies increase; objective function; no-devaluation rule; expansionary policy; policy stance; tough government; policy instrument; critical value; policy convergence; second period problem; Unemployment rate; Unemployment; Inflation

Legal-disclaimer:: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Series:: IMF Working Papers

Volume/Issue:: Volume 1994: Issue 049

Language:: English

Publication Date:: 01 May 1994

DOI:: https://doi.org/10.5089/9781451971811.001

ISBN:: 9781451971811

ISSN:: 1018-5941

Pages:: 28

Keywords:: WP; policy credibility; government debt accumulation; anti-inflationary policies increase; objective function; no-devaluation rule; expansionary policy; policy stance; tough government; policy instrument; critical value; policy convergence; second period problem; Unemployment rate; Unemployment; Inflation

Legal-disclaimer:: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

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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.

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IMF Working Papers

ISSN:: 1018-5941

Publisher:: International Monetary Fund

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