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Checks and Balances, Private Information, and the Credibility of Monetary Commitments

Published online by Cambridge University Press:  09 July 2003

Philip Keefer  and
David Stasavage
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Abstract

In this article, we argue that the effectiveness of central bank independence and exchange-rate pegs in solving credibility problems is contingent on two factors: political institutions and information asymmetries. However, the impact of these two factors differs. We argue that the presence of one institution—multiple political veto players—should be crucial for the effectiveness of central bank independence, but should have no impact on the efficacy of exchange-rate pegs. In contrast, exchange-rate pegs should have a greater anti-inflationary impact when it is difficult for the public to distinguish between inflation generated by policy choice and inflation resulting from exogenous shocks to the economy. Such information asymmetries between the public and the government, however, do not increase the efficacy of central bank independence. Empirical tests using newly developed data on political institutions provide strong support for our hypotheses.

Type
Research Article
Information
International Organization , Volume 56 , Issue 4 , Autumn 2002 , pp. 751 - 774
Copyright
Copyright © The IO Foundation 2002

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