Policy-Delegation and Fixed Exchange Rates

Juergen von Hagen

International Economic Review, 1992, vol. 33, issue 4, 849-70

Abstract: Recent literature interpreting the European Monetary System emphasizes credibility gains from delegating monetary policy to a low-inflation country through fixed exchange rates. This paper presents a model of an exchange rate system as a device for policy delegation in the context of a repeated monetary policy game. In contrast to single-shot games, it generates credibility gains for the high-inflation and low-inflation countries in the system. Credibility gains neither require nor imply hegemony of the low-inflation member. Stochastic realignments enable the members to adopt different inflation trends without destroying the credibility benefits from policy delegation. Copyright 1992 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Date: 1992
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