The Role of Credibility for the Effects of a Change in the Exchange-Rate Policy

Torben M Andersen and Ole Risager

Oxford Economic Papers, 1991, vol. 43, issue 1, 85-98

Abstract: This paper analyzes the real and monetary effects of a shift in the exchange-rate policy in an economy where the private sector is uncertain about the true intentions of the government. In a finitely repeated game of incomplete information, the authors show that a shift towards a tight, fixed exchange-rate policy leads to a loss in output and to a deficit on the current account in the period in which the policy lacks credibility. They also analyze how nominal interest rates and the term structure adjust to the risk that the governments might renege on its announced exchange-rate target. Copyright 1991 by Royal Economic Society.

Date: 1991
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