EconPapers    
Economics at your fingertips  
 

Credibility, Debt and Unemployment: Ireland's Failed Stabilization

Rüdiger Dornbusch

No 2785, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Can the credibility of a stabilization plan affect the output costs of disinflation? The new classical economics has asserted this possibility, but little evidence has been brought forward. This paper analyzes the stabilization program of Ireland in the l980s against the background of the new classical economics, The main questions are two: Did EMS membership yield a special credibility bonus? And is the stabilization program sustainable. The answer to both questions is negative. The idea of a credibility bonus Is an attractive potential policy implication of EMS membership: by joining the EMS, playing by the rules of fixed exchange rates and benefiting from the stabilizing influence of German inflation targets, a country's policy makers achieve a dramatic turn around in expectations, in inflation and in long-term interest rates. But the evidence on international disinflation in the 1980s shows that it was not limited to EMS members; all OECD countries experienced sharply reduced inflation and a large drop in long-term nominal interest rates, EMS membership did not contribute to reduce the sacrifice ratio of disinflation. In fact Germany, on whose anti-inflation credentials the credibility effects are supposedly based has one of the highest sacrifice ratios among DECD countries. Ireland did reduce inflation to the German level, but a serious public debt problem has emerged and the unemployment rate stands near 20 percent. This raises questions of the Sargent-Wallace kind about the sustainability of the program.

Date: 1988-12
Note: EFG ITI IFM
References: View complete reference list from CitEc
Citations: View citations in EconPapers (18)

Published as Economic Policy, no.8, April 1989, pp. 179-209.
Published as Economic Policy, No. 8, pp. 174-201 and 207-209, (April 1989).

Downloads: (external link)
http://www.nber.org/papers/w2785.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:2785

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w2785

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().

 
Page updated 2025-03-19
Handle: RePEc:nbr:nberwo:2785