scholarly journals Imperfect Asset Substitutability and Monetary Policy under Fixed Exchange Rates

10.3386/w0485 ◽  
1980 ◽  
Author(s):  
Maurice Obstfeld
Keyword(s):  
Monetary Policy ◽  
Exchange Rates ◽  
Fixed Exchange Rates

Partisan and Electoral Motivations and the Choice of Monetary Institutions Under Fully Mobile Capital

2002 ◽  
Vol 56 (4) ◽  
pp. 725-749 ◽  
Author(s):  
William Roberts Clark
Keyword(s):  
Monetary Policy ◽  
Central Bank ◽  
Exchange Rates ◽  
Central Bank Independence ◽  
Time Inconsistency ◽  
Social Planner ◽  
Fixed Exchange Rates ◽  
Mobile Capital ◽  
Wide Range ◽  
Institutional Solution

Central bank independence and pegged exchange rates have each been viewed as solutions to the inflationary bias resulting from the time inconsistency of discretionary monetary policy. While it is obvious that a benevolent social planner would opt for such an institutional solution, it is less obvious that a real-world incumbent facing short-term partisan or electoral pressures would do so. In this article, I model the choice of monetary institutions from the standpoint of a survival-maximizing incumbent. It turns out that a wide range of survival-maximizing incumbents do best by forfeiting control over monetary policy. While political pressures do not, in general, discourage monetary commitments, they can influence the choice between fixed exchange rates and central bank independence. I highlight the importance of viewing fiscal policy and monetary policy as substitutes and identify the conditions under which survival-maximizing incumbents will view fixed exchange rates and central bank independence as substitutes. In so doing, I provide a framework for integrating other contributions to this volume.

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