Confidence, credibility, and macroeconomic policy: past, by Richard Burdekin, Farrokh Langdana, Ruth Richardson

By Richard Burdekin, Farrokh Langdana, Ruth Richardson

Self assurance, Credibility and Macroeconomic coverage is split into 3 sections. half I is an summary of the inter-relationship among economic coverage and credibility and inflation. half II specializes in empirical learn and offers ancient in addition to modern proof at the significance of public self belief and expectancies to the good fortune of monetary and fiscal coverage. half III examines the definitions and services of purchaser self assurance because it is measured this day.

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Are these different results explained by the fact that most Latin American stabilisations occurred before the country entered hyperinflation? The Bolivian experience suggests otherwise. 6 per cent for the year preceding Bolivia’s October 1985 stabilisation is higher than die inflation observed in post-First World War Austria and Hungary. 7 per cent in the year following the stabilisation (see Végh, 1992, p. 637). In comparing the Bolivian case to earlier experiences with hyperinflation, Bernholz (1988b) points out that, after the 1985 currency reform, the Bolivian real money supply in 1987 still had not risen beyond 60 per cent of its 1967 value.

Nevertheless, many of the other emerging Central and Eastern European economies have now passed legislation that makes their central banks statutorily independent of government. The central banks of Bulgaria, the Czech Republic, Hungary, Slovakia and Slovenia all have limits on lending to the government (Siklos, 1994; Hochreiter, 1995). These central banks also have legislated price and/or exchange rate objectives, as does the Polish central bank. In spite of statutory provisions for central bank policy independence, the effective degree of central bank autonomy is, however, called into question both by uncertainty as to how the respective statutes will be interpreted in practice and, in many cases, by continuing pressures for deficit finance.

While the use of a currency board or gold (Reynolds, 1993) would limit the government’s ability to renege on its stabilisation programme, basing monetary policy upon either an exchange rate or a gold plank raises the danger of producing costly, and undesirable, outcomes that may actually force abandonment of the stabilisation measures. For example, a rise in the adopted foreign currency would force the currency board to follow restrictive domestic policy to maintain the fixed exchange rate, perhaps with the effect of causing painful, and unnecessary, output losses.

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