A common rationale for EMS membership is that it enhances the credibility of a central bank’s commitment to stable … exchange rate bands and the prevalence of capital controls. In our model, capital controls themselves affect credibility … to reconcile the non-zero width of the bands with the credibility-based interpretation of the EMS …

This paper presents a model for Inflation Targeting under imperfect policy credibility. It modifies the conventional … model in three ways: an endogenous policy credibility process, by which monetary policy can gain or lose credibility over … time; non-linearities in the inflation equation and in the credibility generating process; and an explicit loss function …