Exchange Rate Appreciation As a Signal of a New Policy Stance

March 1, 1991

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

It is shown in a game theoretic framework that it may pay off to signal a “conservative” policy stance--giving a high priority to price stability--by appreciating the exchange rate. Such an appreciation demonstrates to domestic producers and more precisely to the trade union that the new policy stance is meant to be serious. An example explores the welfare implication for the policy maker and the trade union. The empirical background of the paper refers to the monetary policy in Europe. It explains the occurrence of exchange rate commitments to the deutsche mark, with appreciated rates.

Subject: Banking, Exchange rates, Foreign exchange, Labor, Labor unions, Real exchange rates, Wage adjustments, Wages

Keywords: central bank act, Europe, exchange rate appreciation, exchange rate commitment, exchange rate expectation, Exchange rates, expectation of the union, full employment, Labor unions, Real exchange rates, utility function, Wage adjustments, Wages, Western Europe, WP

Pages:
20
Volume:
1991
DOI:
https://doi.org/10.5089/9781451845068.001
Issue:
032
Series:
Working Paper No. 1991/032
Stock No:
WPIEA0321991
ISBN:
9781451845068
ISSN:
1018-5941

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