Exchange Rate Regimes and Independent Central Banks: A Correlated Choice of Imperfectly Credible Institutions
- 1 January 2010
- journal article
- research article
- Published by Cambridge University Press (CUP) in International Organization
- Vol. 64 (3), 411-442
- https://doi.org/10.1017/s0020818310000111
Abstract
Theory and empirical evidence show that low inflation is a precondition for economic growth. Independent central banks and fixed exchange rates are institutional mechanisms that help keep inflation low by lending monetary policy credibility to governments. However, the two institutions are commonly analyzed as substitutes that tie the hands of inflation prone governments. Thus, the literature has difficulties describing why governments would adopt both institutions and the interaction between them. This paper presents a model that allows policymakers the simultaneous choice of monetary institutions and shows that imperfectly credible institutions will overlap: when exchange rates are fixed but adjustable and central bank independence is not fully ascertainable, governments choose both institutions. More generally, the paper generates hypotheses about the conditions that make fixed exchange rates and independent central banks complements or substitutes, thus contributing to an explanation of the diversity of global monetary institutions in the post–Bretton Woods period.Keywords
This publication has 50 references indexed in Scilit:
- Financial Regulation, Monetary Policy, and Inflation in the Industrialized WorldThe Journal of Politics, 2008
- Monetary Institutions, Partisanship, and Inflation TargetingInternational Organization, 2008
- The Choice of Exchange-Rate Regime and Speculative AttacksJournal of the European Economic Association, 2004
- The Modern History of Exchange Rate Arrangements: A ReinterpretationThe Quarterly Journal of Economics, 2004
- Transparency, Democratic Accountability, and the Economic Consequences of Monetary InstitutionsAmerican Journal of Political Science, 2003
- Fear of FloatingThe Quarterly Journal of Economics, 2002
- THEPOLITICALECONOMY OFINTERNATIONALMONETARYRELATIONSAnnual Review of Political Science, 2001
- Federalism and Central bank Independence: The Politics of German Monetary Policy, 1957–92World Politics, 1997
- The Disadvantage of Tying Their Hands: On the Political Economy of Policy CommitmentsThe Economic Journal, 1995
- The Optimal Degree of Commitment to an Intermediate Monetary TargetThe Quarterly Journal of Economics, 1985