Abstract
This paper presents a generalized framework where a discretionary government finds it ex-post optimal to create a downward bias in the exchange rate in addition to the inflation bias of Barro-Gordon type. This dual credibility model helps explain the empirical pattern of public debt financing most recently reported by Falcetti and Missale (2000). Most notably, large and developed economies are predicted to have lower inflation and more conventional home currency bonds. The small and emerging economies, on the other hand, are expected to have relatively higher inflation and more foreign currency bonds. This suggests that a judicious use of a portfolio of home and foreign currency bonds may help economies that are in transition to independent central banking.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
