Credibility and Stabilization

Rüdiger Dornbusch

No 454, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: When governments attempt stabilization why do they not undertake a programme certain to succeed? The paper discusses credibility when it is inconceivable that a programme will succeed with probability one. A cost-benefit analysis establishes an equilibrium programme that has some ex ante probability of failure, so that credibility is always less than full. The context is a one-shot game in which policy-makers are uncertain about the response of the instruments or the post-stabilization economic environment. As a positive theory of stabilization, the paper identifies the factors that increase the chances of success of a programme.

Keywords: Credibility; Stabilization (search for similar items in EconPapers)
Date: 1990-09
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Journal Article: Credibility and Stabilization (1991)
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