| The dissertation generates new insights into institutional choice in monetary policy, the way policy makers take advantage of the existing institutional structure, and how imperfect institutions affect policy outcomes. The first part of the dissertation analyzes policy makers' propensity to relax a fixed exchange rate commitment by performing regular realignments. Transition countries have used fixed rates as an instrument to gain credibility for orthodox macroeconomic policy. Yet the fixed rate instrument has been realigned repeatedly though devaluations, widening of the fluctuation band or greater rates of crawl. Results from a duration model indicate that proximity to elections and multiparty governing coalitions lower the risk of realignment. I also find that left wing parties realign fixed rates relatively less than the right. This last finding supports my argument that the left, which suffers from a reputation problem as the successor to communist parties, uses adherence to transparent fixed exchange rates to improve its credibility. The second paper is motivated by the discrepancy between theoretical assumptions and the practice of monetary policy. Theoretical work has treated fixed rates and independent central banks as alternative mechanisms to gain credibility in monetary policy. As a consequence, this work cannot explain why, in practice, monetary institutions coexist sometimes and cannot address the relationship between them. I develop a model that describes when and why policy makers would choose independent central banks and fixed exchange rates together, alone, or not at all. In the model I define more realistic institutions than the literature has done so far: a fixed exchange rate that is transparent but the public knows can be devalued and a central bank whose independence is more difficult to observe. One result is that, when the two monetary institutions lack perfect credibility, policy makers are likely to choose both of them to help achieve low inflation. Finally, in the third paper I study the impact of central banks and exchange rates on inflation. I find that legally independent central banks in democracies and fixed rates lower inflation both through a disciplinary effect on money growth and through a credibility effect on public's inflation expectations. |
