NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Promises, Promises: Credible Policy Reform via Signaling

Dani Rodrik

NBER Working Paper No. 2600
Issued in May 1988
NBER Program(s):International Trade and Investment, International Finance and Macroeconomics

Empirical experience and theory both suggest that policy reforms can be aborted or reversed if they lack sufficient credibility, One reason for such credibility problems is the legitimate doubt regarding how serious the government really is about :he reform process. This paper considers a framework in which the private sector is unable to distinguish between a genuinely reformist government and its nemesis, a government which simply feigns interest in reform because it is a precondition for foreign assistance The general conclusion is that the rate at which reforms are introduced may serve to convey the government's future intentions, and hence act as a signal of its "type". More specifically, credible policy reform may require going overboard: the government will have to go much farther than it would have chosen to in the absence of the credibility problem.

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Document Object Identifier (DOI): 10.3386/w2600

Published: The Economic Journal, September 1989. citation courtesy of

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