Hostname: page-component-77c89778f8-sh8wx Total loading time: 0 Render date: 2024-07-19T00:57:12.777Z Has data issue: false hasContentIssue false
  • English
  • Français

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

Published online by Cambridge University Press:  19 July 2010

Cristina Bodea
Cristina Bodea
Affiliation:
Michigan State University, East Lansing. E-mail: bodeaana@msu.edu
Get access

Abstract

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.

Type
Research Article
Information
International Organization , Volume 64 , Issue 3 , July 2010 , pp. 411 - 442
Copyright
Copyright © The IO Foundation 2010

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Agénor, Pierre-Richard. 2001. Monetary Policy Under Flexible Exchange Rates: An Introduction to Inflation Targeting. Working Paper 124. Santiago: Central Bank of Chile.Google Scholar
Alesina, Alberto, and Grilli, Vittorio. 1992. The European Central Bank: Reshaping Monetary Politics in Europe. In Establishing a Central Bank: Issues in Europe and Lessons from the US, edited by Canzoneri, Matthew B., Grilli, Vittorio, and Masson, Paul R., 49–77. Cambridge: Cambridge University Press.CrossRefGoogle Scholar
Barro, Robert J., and Gordon, David B.. 1983. A Positive Theory of Monetary Policy in a Natural Rate Model. Journal of Political Economy 91 (4):589–610.CrossRefGoogle Scholar
Berhard, William, and Leblang, David. 2000. The Politics of Speculative Attacks in Industrial Democracies. International Organization 54 (2):291–324.Google Scholar
Bernhard, William, Broz, J. Lawrence, and Clark, William Roberts. 2002. The Political Economy of Monetary Institutions. International Organization 56 (4):693–723.CrossRefGoogle Scholar
Blomberg, S. Brock, Frieden, Jeffry, and Stein, Ernesto. 2005. Sustaining Fixed Rates: The Political Economy of Currency Pegs in Latin America. Journal of Applied Economics 8 (2):203–25.CrossRefGoogle Scholar
Broz, J. Lawrence. 2002. Political System Transparency and Monetary Commitment Regimes. International Organization 56 (4):863–89.CrossRefGoogle Scholar
Broz, J. Lawrence, and Frieden, Jeffry A.. 2001. The Political Economy of International Monetary Relations. Annual Review of Political Science (4):317–43.CrossRefGoogle Scholar
Brune, Nancy. 2009. Building Credibility in Global Financial Markets: Financial Liberalization and the International Monetary Fund. Paper presented at the 67th Annual Conference of the Midwest Political Science Association, April, Chicago.Google Scholar
Bueno de Mesquita, Bruce, Smith, Alastair, Siverson, Randolph M., and Morrow, James D.. 2003. The Logic of Political Survival. Cambridge, Mass.: MIT Press.CrossRefGoogle Scholar
Calvo, Guillermo A., and Reinhart, Carmen M.. 2002. Fear of Floating. Quarterly Journal of Economics 117 (2):379–408.CrossRefGoogle Scholar
Canavan, Chris, and Tommasi, Mariano. 1997. On the Credibility of Alternative Exchange Rate Regimes. Journal of Development Economics 54 (1):101–22.CrossRefGoogle Scholar
Carstens, Agustin, and Jácome, Luis I.. 2005. Latin American Central Bank Reform: Progress and Challenges. Working Paper 05/114. Washington, D.C.: International Monetary Fund.CrossRefGoogle Scholar
Clark, William Roberts. 2002. Partisan and Electoral Motivations and the Choice of Monetary Institutions Under Fully Mobile Capital. International Organization 56 (4):725–49.CrossRefGoogle Scholar
Clark, William Roberts, and Hallerberg, Mark. 2000. Mobile Capital, Domestic Institutions, and Electorally Induced Monetary and Fiscal Policy. American Political Science Review 94 (2):323–46.CrossRefGoogle Scholar
Clarke, Harold, Ho, Karl, and Stewart, Marianne C.. 2002. Major's Lesser (not Minor) Effects: Prime Ministerial Approval and Governing Party Support in Britain Since 1979. Electoral Studies 19 (2/3):255–73.CrossRefGoogle Scholar
Cooper, Richard. 1971. Currency Devaluations in Developing Countries. Princeton Essays in International Finance 86. Princeton, N.J.: Princeton University.Google Scholar
Copelovitch, Mark, and Singer, David Andrew. 2007. Financial Regulation, Monetary Policy, and Inflation in the Industrialized World. Journal of Politics 70 (3):663–80.CrossRefGoogle Scholar
Cukierman, Alex, Goldstein, Itay, and Spiegel, Yossi. 2004. The Choice of Exchange-Rate Regime and Speculative Attacks. Journal of the European Economic Association 2 (6):1206–241.CrossRefGoogle Scholar
Cukierman, Alex, Miller, Geoffrey P., and Neyapti, Bilin. 2002. Central Bank Reform, Liberalization and Inflation in Transition Economies: An International Perspective. Journal of Monetary Economics 49 (2):237–64.CrossRefGoogle Scholar
Cukierman, Alex, Webb, Steven, and Neyapti, Bilin. 1992. The Measurement of Central Bank Independence and Its Effect on Policy Outcome. World Bank Economic Review 6:353–98.CrossRefGoogle Scholar
Downs, Anthony. 1957. An Economic Theory of Democracy. New York: Harper and Row.Google Scholar
Drazen, Allan. 2000. Political Economy in Macroeconomics. Princeton, N.J.: Princeton University Press.CrossRefGoogle Scholar
Drezner, Daniel W. 2007. All Politics Is Global: Explaining International Regulatory Regimes. Princeton, N.J.: Princeton University Press.Google Scholar
Edwards, Sebastian. 1996. The Determinants of the Choice Between Fixed and Flexible Exchange-Rate Regimes. NBER Working Paper 5756. Cambridge, Mass.: National Bureau of Economic Research.CrossRefGoogle Scholar
Eichengreen, Barry, Masson, Paul Robert, Savastano, Miguel, and Sharma, Sunil. 1999. Transition Strategies and Nominal Anchors on the Road to Greater Exchange-Rate Flexibility. Princeton Essays in International Finance 213. Princeton, N.J.: Princeton University Press.Google Scholar
Eichengreen, Barry, Rose, Andrew K., and Wyplosz, Charles. 1996. Contagious Currency Crises. NBER Working Paper 5681. Cambridge, Mass.: National Bureau of Economic Research.CrossRefGoogle Scholar
Fatas, Antonio, Mihov, Ilian, and Rose, Andrew K.. 2007. Quantitative Goals for Monetary Policy. Journal of Money, Credit and Banking 39 (5):1163–76.CrossRefGoogle Scholar
Frankel, Jeffrey A. 2005. Mundell-Fleming Lecture: Contractionary Currency Crashes in Developing Countries. IMF Staff Papers 52 (2):149–92. Washington, D.C.: International Monetary Fund.CrossRefGoogle Scholar
Frieden, Jeffry A. 2002. Real Sources of European Currency Policy: Sectoral Interests and European Monetary Integration. International Organization 56 (4):831–60.CrossRefGoogle Scholar
Ghosh, Atish R., Gulde, Anne-Marie, Ostry, Jonathan D., and Wolf, Holger C.. 1997. Does the Nominal Exchange Rate Regime Matter? NBER Working Paper 5874. Cambridge, Mass.: National Bureau of Economic Research.CrossRefGoogle Scholar
Giavazzi, Francesco, and Pagano, Marco. 1988. The Advantage of Tying One's Hands: EMS Discipline and Central Bank Credibility. European Economic Review 32 (5):1055–75.CrossRefGoogle Scholar
International Monetary Fund. 2006. Inflation Targeting and the IMF. Unpublished manuscript. Washington, D.C.: IMF.CrossRefGoogle Scholar
International Organization. 2002. Special Issue: The Political Economy of Monetary Institutions 56 (4).Google Scholar
Iversen, Torben. 1998. Wage Bargaining, Central Bank Independence, and the Real Effects of Money. International Organization 52 (3):469–504.CrossRefGoogle Scholar
Jácome, Luis I., and Vázquez, Francisco. 2005. Any Link Between Legal Central Bank Independence and Inflation? Evidence from Latin America and the Caribbean. IMF Working Paper 05/75. Washington, D.C.: International Monetary Fund.CrossRefGoogle Scholar
Jupille, Joseph, and Snidal, Duncan. 2006. The Choice of International Institutions: Cooperation, Alternatives and Strategies. Available at ⟨http://www.princeton.edu/smeunier/Jupille-Snidal.pdf⟩. Accessed 2 April 2010.Google Scholar
Kayser, Mark Andreas. 2005. Who Surfs, Who Manipulates? The Determinants of Opportunistic Election Timing and Electorally Motivated Economic Intervention. American Political Science Review 99 (1):17–27.CrossRefGoogle Scholar
Keefer, Philip, and Stasavage, David. 2002. Checks and Balances, Private Information, and the Credibility of Monetary Commitments. International Organization 56 (4): 751–74.CrossRefGoogle Scholar
Klein, W. Michael, and Marion, Nancy P.. 1997. Explaining the Duration of Exchange Rate Pegs. Journal of Development Economics 54 (2):387–404.CrossRefGoogle Scholar
Koremenos, Barbara, Lipson, Charles, and Snidal, Duncan. 2003. The Rational Design of International Institutions. Cambridge: Cambridge University Press.CrossRefGoogle Scholar
Kuttner, Kenneth N., and Posen, Adam S.. 2001. Beyond Bipolar: A Three-Dimensional Assessment of Monetary Frameworks. Working Paper 52. Vienna: Austrian National Bank.CrossRefGoogle Scholar
Levy-Yeyati, Eduardo, and Sturzenegger, Federico. 2003. To Float or to Fix: Evidence on the Impact of Exchange Rate Regimes on Growth. American Economic Review 93 (4):1173–93.CrossRefGoogle Scholar
Lohmann, Susanne. 1992. Optimal Commitment in Monetary Policy: Credibility Versus Flexibility. American Economic Review 82 (1):273–86.Google Scholar
Lohmann, Susanne. 1998. Federalism and Central Bank Independence: The Politics of German Monetary Policy, 1957–92. World Politics 50 (3):401–46.CrossRefGoogle Scholar
Martinez, Guillermo Ortiz. 1998. What Lessons Does the Mexican Crisis Hold for Recovery in Asia? Finance and Development 35 (2):6–9.Google Scholar
Masson, Paul R., Savastano, Miguel A., and Sharma, Sunil. 1997. The Scope for Inflation Targeting in Developing Countries. IMF Working Paper 97/130. Washington, D.C.: International Monetary Fund.CrossRefGoogle Scholar
Milesi-Ferretti, Gian Maria. 1995. The Disadvantage of Tying Their Hands: On the Political Economy of Policy Commitments. Economic Journal 105 (433):1381–402.CrossRefGoogle Scholar
Mishkin, Frederic S., and Savastano, Miguel A.. 2001. Monetary Policy Strategies for Latin America. Journal of Development Economics 66 (2):415–44.CrossRefGoogle Scholar
Mohanty, Madhusudan S., and Klau, Marc. 2005. Monetary Policy Rules in Emerging Market Economies: Issues and Evidence. In Monetary Policy and Macroeconomic Stabilization in Latin America, edited by Langhammer, Rolf J. and de Souza, Lúcio Vinhas, 205–46. Berlin, Germany: Springer-Verlag.CrossRefGoogle Scholar
Moser, Peter. 1999. Checks and Balances, and the Supply of Central Bank Independence. European Economic Review 43 (8):1569–93.CrossRefGoogle Scholar
Mukherjee, Bumba, and Singer, David Andrew. 2008. Monetary Institutions, Partisanship, and Inflation Targeting. International Organization 62 (2):323–58.CrossRefGoogle Scholar
Obstfeld, Maurice. 1986. Rational and Self-fulfilling Balance-of-Payments Crises. American Economic Review 76 (1):72–81.Google Scholar
Obstfeld, Maurice, and Rogoff, Kenneth S.. 1995. The Mirage of Fixed Exchange Rates. Journal of Economic Perspectives 9 (4):73–96.CrossRefGoogle Scholar
O'Mahony, Angela. 2007. Escaping the Ties That Bind: Exchange Rate Choice Under Central Bank Independence. Comparative Political Studies 40 (7):808–31.CrossRefGoogle Scholar
Palmer, Harvey D., and Whitten, Guy D.. 2000. Government Competence, Economic Performance and Endogenous Election Dates. Electoral Studies 19 (2/3):413–26.CrossRefGoogle Scholar
Posen, Adam S. 1995. Declarations Are Not Enough: Financial Sector Sources of Central Bank Independence. In NBER Macroeconomics Annual 1995, 10, edited by Bernanke, Ben S. and Rotemberg, Julio J., 253–74. Cambridge, Mass: MIT Press.Google Scholar
Powell, Bingham G. Jr., and Whitten, Guy D.. 1993. A Cross-National Analysis of Economic Voting: Taking Account of the Political Context. American Journal of Political Science 37 (2):391–414.CrossRefGoogle Scholar
Reinhart, Carmen M., and Rogoff, Kenneth S.. 2004. The Modern History of Exchange Rate Arrangements: A Reinterpretation. Quarterly Journal of Economics 119 (1):1–48.CrossRefGoogle Scholar
Rogoff, Kenneth S. 1985. The Optimal Degree of Commitment to an Intermediate Monetary Target: Inflation Gains Versus Stabilization Costs. Quarterly Journal of Economics 100 (4):1169–89.CrossRefGoogle Scholar
Stasavage, David. 2003. Transparency, Democratic Accountability, and the Economic Consequences of Monetary Institutions. American Journal of Political Science 47 (3):389–402.CrossRefGoogle Scholar
Svensson, Lars E.O. 1997. Exchange Rate Target or Inflation Target for Norway? In Choosing a Monetary Policy Target, edited by Christiansen, Anne Berit and Qvigstad, Jan Fredirik, 120–38. Oslo, Norway: Scandinavian University Press.Google Scholar