Weak public institutions, including high levels of corruption, characterize many developing countries. We demonstrate that this feature has important implications for the design of monetary policymaking institutions. We find that a pegged exchange rate or dollarization, while sometimes prescribed as a solution to the credibility problem, is typically not appropriate for countries with poor institutions. Such an arrangement is inferior to a Rogoff-style conservative central banker, whose optimal degree of conservatism is proportional to the quality of institutions. Finally, we cast doubt on the notion that a low inflationary framework can induce governments to improve public institutions.
The final version of this article can be found at the Journal of International Economics.
Huang, Haizhou, and Shang-Jin Wei. "Monetary Policies for Developing Countries: The Role of Institutional Quality." Journal of International Economics 70, no. 1 (September 2006): 239-252.
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