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 monetary coverage and credibility and inflation. half II makes a speciality of empirical study and provides ancient in addition to modern proof at the value of public self belief and expectancies to the luck of monetary and fiscal coverage. half III examines the definitions and services of buyer self assurance because it is measured at the present time.

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Estonia). However, an exchange rate peg can only be credible if the peg itself is sustainable and consistent with the economic fundamentals— conditions that were palpably absent in the recent operation of the European Monetary System. CONCLUSIONS AND IMPLICATIONS The importance of expectations, and of public confidence in the government, cannot be stressed too much. As discussed above, even drastic fiscal restraint often failed to put an end to the inflation process in Latin America. In Bolivia, for example, public reluctance to hold the new currency appears to have been instrumental in the fact that inflation—although greatly reduced—remained stubbornly at around the 20 per cent level after the 1985 stabilisation and currency reform.

Since taxes decline by Tt in period t, the current disposable income of households increases by Tt. If the government then decides to balance its budget from period onwards, it must raise taxes in period by just enough to service the principal and interest payments on debt Bt issued in period t. Therefore, taxes will have to be raised by Bt(1+Rt) dollars in period . The crucial issue here is the determination of household behaviour in period t when disposable income rises. In this simple case, the net change in the present value of aggregate real taxes is: (2) Since there is no net aggregate effect of real taxes, the government’s bond-financed deficit in period t has no aggregate wealth effect and hence does not affect household consumption and aggregate demand.

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. By contrast, in the post-First World War hyperinflations, the decline in the real money supply during the inflationary period was followed by a return to normal, pre-inflation levels. Bernholz (1988b, p.

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