The Role of Credibility for the Effects of a Change in the Exchange-Rate Policy
1987 (English)Report (Other academic)
This paper analyses the real and monetary effects of a shift in the exchange-rate policy in an economy where the private sector is uncertain about the true intentions of the government.
In a repeated game of incomplete information, we show that a shift towards a tight, fixed exchange-rate policy leads to a loss in output and to a deficit on the current account in the period in which the policy lacks credibility. We also show that the long interest rate is above the short interest rate, reflecting the risk that the government reneges on its announced exchange-rate target.
Place, publisher, year, edition, pages
Stockholm: IIES , 1987. , 42 p.
Seminar Paper / Institute for International Economic Studies, Stockholm University, ISSN 0347-8769 ; 377
IdentifiersURN: urn:nbn:se:su:diva-41559OAI: oai:DiVA.org:su-41559DiVA: diva2:331172
Published in connection with a visit at the IIES.2010-07-212010-07-212010-07-21