Credibility and commitment of monetary policy in open economies

We study the delegation of monetary policy to independent central bankers in a two-country world with monetary spillovers. It is shown that, under the hypotheses of imperfect commitment and private information, the equilibrium degree of commitment depends on the correlation structure of the shocks hitting the economies. When the correlation is negative (as when the variance of output depends mainly on shocks to the terms of trade) there is strategic complementarity in the degree of commitment in the two countries. When the correlation is positive (common technological or demand shocks) there is strategic substitutability. In this latter case, the degree of commitment is shown to be increasing in the correlation among shocks. Common components in the international business cycle have been shown in several studies to be relatively more relevant in developed countries. Therefore, our results may contribute to explaining why the institutional solution to the inflationary bias has been adopted in the most advanced countries.