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Bad Dreams Under Alternative Anchors: Are the Consequences Different?

Author

Listed:
  • Mr. Leonardo Auernheimer
  • Ms. Susan M George

Abstract

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.

Suggested Citation

  • Mr. Leonardo Auernheimer & Ms. Susan M George, 2000. "Bad Dreams Under Alternative Anchors: Are the Consequences Different?," IMF Working Papers 2000/020, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2000/020
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    File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=3423
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    Cited by:

    1. Javier Reyes, 2007. "Exchange Rate Passthrough Effects and Inflation Targeting in Emerging Economies: What is the Relationship?," Review of International Economics, Wiley Blackwell, vol. 15(3), pages 538-559, August.

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