Credibility and Commitment of Monetary Policy in Open Economies

Marcello D'Amato and Riccardo Martina

CSEF Working Papers from Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy

Abstract: In this paper we study the delegation of monetary policy to independent central bankers in a two country world with monetary spill-overs. The paper shows that under imperfect commitment and private information of the Central Bankers about their objectives the optimal degree of commitment depends on the correlation structure of the shock hitting the economies. When the correlation of the shocks across countries is negative, as when the variance to output depends mainly on shocks to the terms of trade, there exist strategic complementarity in the optimal degree of commitment. When the correlation of shocks is positive (common technological or demand shocks) there exist strategic substitutability. These result may provide rationale for the simultaneous increasing attention to the institutional solution to the credibility problem in monetary policy in most advanced countries in the last decades.

Keywords: monetary policy delegation; central bankers; private information; strategic interaction (search for similar items in EconPapers)
JEL-codes: D82 E58 F42 (search for similar items in EconPapers)
Date: 2000-09-01
New Economics Papers: this item is included in nep-cba and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published in European Journal of Political Economy, 2003, vol. 21, pages 872-902

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Related works:
Journal Article: Credibility and commitment of monetary policy in open economies (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:sef:csefwp:47

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