Anti-inflationary Reputation and Exchange Rate Commitment: The Peseta in the EMS
Keywords:
counterinflation reputation, exchange rate mechanism, European Monetary System, credibility, peseta, Kalman filterAbstract
In this paper, we analyse the evolution of the counterinflation reputation implied by joining the exchange rate mechanism of the European Monetary System. We apply a Backus and Driffill (1985a, b) type model where maintaining the existing parity would improve the probability perceived by agents that an existing tough government is in charge. We consider, according to Masson (1995), a concept of credibility that includes the costs of sticking to its policies that any government (tough or wet) must take into account, especially when shocks and government policies have persistent effects on unemployment, and consequently constrain the room for manoeuvre in subsequent periods. The model is tested for the Spanish case over the period 1989-92, using the Kalman filter.Downloads
References
Backus, D., & Driffill, J. (1985a). Rational expectations and policy credibility following a change in regime. Review of Economic Studies, 52(2), 211–221. https://doi.org/10.2307/2297617
Backus, D., & Driffill, J. (1985b). Inflation and reputation. American Economic Review, 75(3), 530–538.
Barro, R., & Gordon, D. B. (1983a). A positive theory of monetary policy in a natural-rate model. Journal of Political Economy, 91(4), 589–610. https://doi.org/10.1086/261167
Barro, R., & Gordon, D. B. (1983b). Rules, discretion and reputation in a model of monetary policy. Journal of Monetary Economics, 12(1), 101–121. https://doi.org/10.1016/0304-3932(83)90051-x
Chen, Z., & Giovaninni, A. (1993). The determinants of realignment expectations under the EMS-Some empirical regularities (CEPR Discussion Paper N.º 790). CEPR.
De Grauwe, P. (1997). The economics of monetary integration (3.ª ed.). Oxford University Press.
Dolado, J. J., & De Lamo, A. (1993). Un modelo del mercado de trabajo y la restricción de oferta de la economía española. Investigaciones Económicas, 17(1), 87–118.
Drazen, A., & Masson, P. R. (1994). Credibility of policies versus credibility of policymakers. Quarterly Journal of Economics, 109(3), 735–754. https://doi.org/10.2307/2118420
Driffill, J., & Miller, M. (1993). Learning and inflation convergence in the ERM. Economic Journal, 103(417), 369–378.
Eichengreen, B., Rose, A. K., & Wyplosz, C. (1995). Exchange market mayhem: The antecedents and aftermath of speculative attacks. Economic Policy, 21, 249–296.
Flood, R., & Garber, P. (1984a). Collapsing exchange-rate regimes. Some linear examples. Journal of International Economics, 17(1-2), 1–13.
Flood, R., & Garber, P. (1984b). Gold monetization and gold discipline. Journal of Political Economy, 92(1), 90–107. https://doi.org/10.1086/261209
Flood, R. P., & Isard, P. (1989). Monetary policy strategies. IMF Staff Papers, 36(3), 612–632. https://doi.org/10.2307/3867049
Giavazzi, F., & Giovaninni, A. (1989). Limiting exchange rate flexibility: The European Monetary System. MIT Press.
Giavazzi, F., & Pagano, M. (1988). The advantage of tying one's hands. EMS discipline and Central Bank credibility. European Economic Review, 32(5), 1055–1082.
Gross, D. (1992). Capital controls and foreign exchange market crises in the EMS. European Economic Review, 36(8), 1533–1544.
Hamilton, J. D. (1994). State-space models. In R. Engle & D. L. McFadden (Eds.), Handbook of econometrics (Vol. IV, pp. 3039–3080). North-Holland. https://doi.org/10.1016/s1573-4412(05)80019-4
Harrison, P. J., & Stevens, G. F. (1976). Bayesian forecasting. Journal of the Royal Statistical Society (Series B), 38.
Harvey, A. C. (1989). Forecasting, structural time series models and the Kalman filter. Cambridge University Press. https://doi.org/10.1017/cbo9781107049994
Krugman, P. (1979). A model of balance-of-payments crises. Journal of Money, Credit and Banking, 11(3), 311–325.
Kydland, F. E., & Prescott, E. C. (1977). Rules rather than discretion: The inconsistency of optimal plans. Journal of Political Economy, 85(3), 473–491. https://doi.org/10.1086/260580
Masson, P. R. (1995). Gaining and losing ERM credibility: The case of the United Kingdom. Economic Journal, 105(430), 571–582. https://doi.org/10.2307/2235018
Miller, M., & Sutherland, A. (1993). Contracts, credibility, common knowledge: Their influence on inflation convergence. IMF Staff Papers, 40(1), 178–200. https://doi.org/10.2307/3867381
Obstfeld, M. (1986). Rational and self-fulfilling balance of payments crises. American Economic Review, 76(1), 72–81.
Obstfeld, M. (1991). Destabilizing effects of exchange rate escape clauses (NBER Working Paper N.º 3603). National Bureau of Economic Research.
Ozkan, F. G., & Sutherland, A. (1993). A model of the ERM crisis (Discussion Paper 879). CEPR.
Rose, A., & Svensson, L. (1994). European exchange rate credibility before the fall. European Economic Review, 38(6), 1185–1216. https://doi.org/10.1016/0014-2921(94)90067-1
Sapena, J., & Tamarit, C. R. (1998). Credibilidad y reputación en uniones monetarias incompletas. La experiencia europea [Mimeo].
Downloads
Published
How to Cite
Issue
Section
License
Copyright (c) 1998 Vicente Esteve, Juan Sapena, Cecilio R. Tamarit
This work is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.
Article usage
- ViewsTimes this article's page was opened since the journal started recording statistics. One person can visit more than once.
- 184
- DownloadsTimes the full text of this article (usually the PDF) was opened or downloaded.
- 161
All time, as recorded by the journal.
Last 2 years: 65 views, 101 downloads.
0.88 downloads per view (journal average 1.65).Downloads of the full text for every abstract view of this article, compared with the whole journal.
Explore the journal's metrics
