Journal Articles

Exchange Rate Regimes and Independent Central Banks : A Correlated Choice of Imperfectly Credible Institutions

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Theory and empirical evidence show that low inflation is a precondition for economic growth. Independent central banks and fixed exchange rates are institutional mechanisms that help keep inflation low by lending monetary policy credibility to governments. However, the two institutions are commonly analyzed as substitutes that tie the hands of inflation prone governments. Thus, the literature has difficulties describing why governments would adopt both institutions and the interaction between them. This paper presents a model that allows policymakers the simultaneous choice of monetary institutions and shows that imperfectly credible institutions will overlap: when exchange rates are fixed but adjustable and central bank independence is not fully ascertainable, governments choose both institutions. More generally, the paper generates hypotheses about the conditions that make fixed exchange rates and independent central banks complements or substitutes, thus contributing to an explanation of the diversity of global monetary institutions in the post–Bretton Woods period.

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Series Title

International Organization

Call Number

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Publisher

Cambridge : Cambridge University Press., 2010

Collation

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Language

English

ISBN/ISSN

00208183

Classification

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Content Type

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Media Type

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Carrier Type

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Edition

Vol. 64,No. 3, July 2010.pp.411-442

Subject(s)

Exchange rate regimes

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