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Discussion Paper Details

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Title: Credibility and Stabilization

Author(s): Rudiger Dornbusch

Publication Date: September 1990

Keyword(s): Credibility and Stabilization

Programme Area(s): International Macroeconomics

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.

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Bibliographic Reference

Dornbusch, R. 1990. 'Credibility and Stabilization'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=454