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

41 Pages Posted: 8 Jun 2001

See all articles by Philip Keefer

Philip Keefer

Inter-American Development Bank

David Stasavage

New York University (NYU)

Date Written: February 2001

Abstract

In economically volatile conditions in which it is more difficult for the public to distinguish inflation deliberately generated by government from inflation created by unanticipated economic shocks, the anti-inflationary effect of central bank independence will be unchanged but the effectiveness of exchange rate pegs will be significantly improved.

Keefer and Stasavage develop and test several new hypotheses about the anti-inflationary effect of central bank independence and exchange rate pegs in the context of different institutions and different degrees of citizen information about government policies.

Theory provides strong reason to believe that while central bank independence will prove more effective as a commitment mechanism in countries where multiple players in government have veto power (checks and balances), the number of veto players will have no effect on the credibility of exchange rate pegs. Conversely, Keefer and Stasavage argue that central bank independence does not solve problems of commitment that arise when citizens are imperfectly informed about the contribution of government policy to inflation. Exchange rate pegs, however, mitigate these problems.

The authors present extensive evidence from cross-country tests using newly developed data that provide strong support for their propositions.

This paper - a product of Regulation and Competition Policy, Development Research Group - is part of a larger effort in the group to understand the institutional conditions for policy reform and success. The authors may be contacted at pkeefer@worldbank.org or d.stasavage@lse.ac.uk.

JEL Classification: D72, D78, E52, E58

Suggested Citation

Keefer, Philip and Stasavage, David, Checks and Balances, Private Information, and the Credibility of Monetary Commitments (February 2001). World Bank Policy Research Working Paper No. 2542. Available at SSRN: https://ssrn.com/abstract=271693

Philip Keefer (Contact Author)

Inter-American Development Bank ( email )

1300 New York Ave., NW
Washington, DC 20577
United States
202-623-1961 (Phone)

David Stasavage

New York University (NYU) ( email )

Bobst Library, E-resource Acquisitions
20 Cooper Square 3rd Floor
New York, NY 10003-711
United States

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