Signalling the strength of an exchange rate commitment

The conditions under which a policymaker might rationally signal the streng th of an exchange rate commitment by revaluation are considered. We derive an intuitive result: the policymaker signals strong commitment by revaluati on if initial credibility is low, but will refrain from doing so if credibi lity is already high, as any such signal is costly. The analysis suggests t hat if an exchange rate rule is intended to improve anti-inflation credibil ity. then it ought to be sufficiently flexible to allow for orderly revalua tions of the exchange rate against the anchor currency.