Credibility of Policies Versus Credibility of Policymakers

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 signaling toughness and raising credibility. Whether a policy is carried out, however, will also reflect the...

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Bibliographic Details
Published in:The Quarterly journal of economics 1994-08, Vol.109 (3), p.735-754
Main Authors: Drazen, Allan, Masson, Paul R.
Format: Article
Language:English
Subjects:
Credibility
Critical values
Decision-making
Economic conditions
Economic models
Economic policy
Exchange rates
Inflation rates
International financial institutions
Macroeconomic modeling
Monetary policy
Policy making
Policy sciences
Political planning
Studies
Toughness
Unemployment
Unemployment rates
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Summary: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 signaling 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 unemplo3nnent rate gets too high. Our main conclusion is that if there is persistence in unemplo3n3ient, 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 EMS interest rates and find support for our hypothesis.
ISSN:0033-5533
1531-4650
DOI:10.2307/2118420