Abstract
We analyze a simple policy game featuring monetary credibility problems, and argue that loss of monetary discretion is not advantageous. Two elements form the basis of our analysis. Firstly, we endogenize the source of credibility problems, and secondly, we consider a dynamic framework where credibility problems are not time-invariant. By doing this we are able to demonstrate that credibility problems are temporary, and in steady state, the government has removed these through sound policies. A binding policy rule will only serve as an obstacle towards this steady state.
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