Bad Dreams Under Alternative Anchors: Are the Consequences Different?

January 1, 2000

Preview Citation

Format: Chicago

Leonardo Auernheimer, and Susan M George. Bad Dreams Under Alternative Anchors: Are the Consequences Different?, (USA: International Monetary Fund, 2000) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Using a simple model, this paper shows how a strict monetary rule exhibits characteristics similar to those of an exchange rate anchor, in terms of a lack of robustness in the presence of adverse expectations (“bad dreams”). More specifically, as an anticipated devaluation under an exchange rate rule leads to well-known contractionary effects, an anticipated increase in the money stock under a monetary rule, though initially expansionary, becomes contractionary when these expectations are not validated. This suggests that much of the criticism of an exchange rate anchor implicitly considers not another rule but rather, discretion as the alternative.

Subject: Exchange rate adjustments, Exchange rates, Monetary base, Real exchange rates, Real interest rates

Keywords: Money stock, Real interest rate, WP

Publication Details

Pages:

23
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2000/020
Stock No:

WPIEA0202000
ISBN:

9781451843835
ISSN:

1018-5941

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