Skip to main content
Article thumbnail
Location of Repository

Checks and balances, private information, and the credibility of monetary commitments

By Philip Keefer and David Stasavage


We argue that the effectiveness of central bank independence and of exchange rate pegs in solving credibility problems is contingent on two factors: political institutions and information asymmetries. However, the impact of these two factors differs. We argue that the presence of one institution, multiple political veto players, should be crucial for the effectiveness of central bank independence, but should have no impact on the efficacy of exchange rate pegs. In contrast, exchange rate pegs should have a greater anti-inflationary impact when it is difficult for the public to distinguish between inflation generated by policy choice and inflation resulting from exogenous shocks to the economy. Such information asymmetries between the public and the government, however, do not increase the efficacy of central bank independence. Empirical tests using newly developed data on political institutions provide strong support for these hypotheses

Topics: JF Political institutions (General)
Year: 2002
DOI identifier: 10.1162/002081802760403766
OAI identifier:
Provided by: LSE Research Online
Download PDF:
Sorry, we are unable to provide the full text but you may find it at the following location(s):
  • (external link)
  • (external link)
  • (external link)
  • Suggested articles


    1. (1998). A Political Explanation of Variations in Central Bank Independence. doi
    2. (1983). A Positive Theory of Monetary Policy in A Natural Rate Model. doi
    3. (1987). Administrative Procedures as Instruments of Political Control. doi
    4. (2000). Bureaucratic Delegation and Political Institutions: When are Independent Central Banks Irrelevant? World Bank Policy Research Working Paper 2356. doi
    5. (1983). Bureaucratic Discretion or Congressional Control? Regulatory Policymaking by the Federal Trade Commission. doi
    6. (1998). Central Bank Reform, Liberalization, and Inflation in Transition Economies: an International Perspective. doi
    7. (1999). Checks and Balances, and the Supply of Central Bank Independence. doi
    8. (1997). Credible Commitments, International Investment Flows, and Central Bank Independence in Developing Countries: A Signaling Model.
    9. (1999). Delegating powers : a transaction cost politics approach to policy making under separate powers. New York : doi
    10. (1999). Democratic Institutions and Exchange Rate Commitments. doi
    11. (2002). Does it Pay to be Transparent: International Evidence from Central Bank Forecasts?, Federal Reserve Bank of St. doi
    12. (1995). Does the Nominal Exchange Rate Regime Matter? IMF Working Paper no.121. doi
    13. (1998). Federalism and Central Bank Independence: the Politics of German Monetary Policy, doi
    14. (1997). Gatekeepers of Growth. doi
    15. (1992). Measuring the Independence of Central Banks and its Effect on Policy Outcomes. doi
    16. (1998). Mixed Signals: Central Bank Independence, Coordinated Wage Bargaining, and European Monetary Union. doi
    17. (1996). Models of currency crises with self-fulfilling features. doi
    18. (1985). Monetary Policy Games and the Role of Private Information. doi
    19. (2001). New Tools in Comparative Political Economy: The Database of Political Institutions. doi
    20. (1997). On the Credibility of Alternative Exchange Rate Regimes. doi
    21. (1993). Openness and Inflation: Theory and Evidence. doi
    22. (1999). Partially Independent Central Banks, Politically Responsive Governments, and Inflation, doi
    23. (2002). Political Institutions and the Transparency of Monetary Policy Commitments. This volume.
    24. (2002). Politics and the Determinants of Banking Crises: The Effects of Political Checks and Balances. doi
    25. Rules, Discretion and Reputation in a Model of Monetary Policy. doi
    26. (1981). Several Tests for Model Specification in the Presence of Alternative Hypotheses. doi
    27. (1986). Signaling in a Model of Monetary Policy with Incomplete Information. doi
    28. (1985). The Optimal Degree of Commitment to an Intermediate Monetary Target. doi
    29. (2001). Transparency and Credibility: Monetary Policy with Unobservable Goals. doi
    30. (2001). Transparency of Monetary Policy and the Costs of Disinflation. Paper presented to the APSA meetings, doi
    31. (1999). Transparency, Reputation and Credibility Under Floating and Pegged Exchange Rates doi
    32. (2000). Verifiability and the Vanishing Intermediate Exchange Rate Regime. doi
    33. (2002). Veto Players: How Political Institutions Work. doi
    34. (1996). Why Does Inflation Differ Across Countries? doi

    To submit an update or takedown request for this paper, please submit an Update/Correction/Removal Request.