Credibility of Policies Versus Credibility of Policymakers

28 Pages Posted: 15 Feb 2006

See all articles by Allan Drazen

Allan Drazen

University of Maryland - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Paul R. Masson

International Monetary Fund (IMF) - Research Department; The Brookings Institution

Multiple version iconThere are 2 versions of this paper

Date Written: May 1994

Abstract

Standard models of policy credibility, defined as the expectation that an announced policy will be carried out, emphasize the preferences of the policymaker, and the role of tough policies in signalling toughness and raising credibility. Whether a policy is carried out, however, will also reflect the state of the economy. We present a model in which a policymaker maintains a fixed parity in good times, but devalues if the unemployment rate gets too high. Our main conclusion is that if there is persistence in unemployment, observing a tough policy in a given period may lower rather than raise the credibility of a no-devaluation pledge in subsequent periods. We test this implication on data for the interest rate differential between France and Germany and find support for our hypothesis.

JEL Classification: E43, E61, F31

Suggested Citation

Drazen, Allan and Masson, Paul R., Credibility of Policies Versus Credibility of Policymakers (May 1994). IMF Working Paper, Vol. , pp. 1-28, 1994. Available at SSRN: https://ssrn.com/abstract=883513

Allan Drazen (Contact Author)

University of Maryland - Department of Economics ( email )

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Centre for Economic Policy Research (CEPR)

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National Bureau of Economic Research (NBER)

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Paul R. Masson

International Monetary Fund (IMF) - Research Department ( email )

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United States

The Brookings Institution ( email )

1775 Massachusetts Ave. NW
Washington, DC 20036-2188
United States
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