TY  - JOUR
AU  - Drazen,Allan
AU  - Masson,Paul R.
TI  - Credibility of Policies versus Credibility of Policymakers
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 4448
PY  - 1993
Y2  - September 1993
UR  - http://www.nber.org/papers/w4448
L1  - http://www.nber.org/papers/w4448.pdf
N1  - Author contact info:
Allan Drazen
Department of Economics
University of Maryland
College Park, MD 20742
Tel: 301/405-3477
Fax: 301/405-7835
E-Mail: drazen@econ.umd.edu

Paul Masson
Rotman School of Management
105 St. George St.
University of Toronto
Toronto, ON M5S 3E6
Canada
Tel: 416-946-0434
Fax: 416-978-5433
E-Mail: paul.masson@rotman.utoronto.ca
AB  - Standard models of policy credibility. defined as the expectation that an announced policy will be carried out. emphasize the preferences of the policymaker (his "type") and the role of policies in signaling type. Whether a policy is carried out. however. should also reflect the state of the economy. so that even a "tough" policymaker may renege on an announced policy in adverse circumstances. We investigate this alternative notion of credibility, using an "escape clause" model of devaluation. 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 the process driving unemployment, following a tough policy in a given period may lower rather than raise the credibility of a no-devaluation pledge in subsequent periods. in contrast to the results in the earlier literature. We test this implication on EMS interest rates and find support for our hypothesis.
ER  -