Private information: an argument for a fixed exchange rate system

Ludovic Aubert and Daniel Laskar

CEPREMAP Working Papers (Couverture Orange) from CEPREMAP

Abstract: In a two-country model, the paper considers reputational equilibria for monetary policies in the case where the central banks have some private information. It is shown that a fixed exchange rate system may lead, in both countries, to lower inflation biases than a flexible exchange rate system. No exogenous costs (like "political costs") of leaving the fixed exchange rate system are required for such a result to hold. The reason is that private information makes a money supply rule more difficult to sustain through reputational forces than an exchange rate rule.

JEL-codes: F53 E52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ind
Date: 1999
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