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Credibility and Stabilization

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  • Dornbusch, Rudiger

Abstract

When governments attempt stabilization why do they not undertake a programme certain to succeed? The paper discusses credibility when it is inconceivable that a programme will succeed with probability one. A cost-benefit analysis establishes an equilibrium programme that has some ex ante probability of failure, so that credibility is always less than full. The context is a one-shot game in which policy-makers are uncertain about the response of the instruments or the post-stabilization economic environment. As a positive theory of stabilization, the paper identifies the factors that increase the chances of success of a programme.

Suggested Citation

  • Dornbusch, Rudiger, 1990. "Credibility and Stabilization," CEPR Discussion Papers 454, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:454
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    Keywords

    Credibility; Stabilization;

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