Losing Credibility: The Stabilization Blues

Author/Editor:

Pablo Emilio Guidotti ; Carlos A. Végh Gramont

Publication Date:

September 1, 1992

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

In exchange rate-based stabilization programs, credibility often follows a distinct time pattern. At first it rises as the highly visible nominal anchor provides a sense of stability and hopes run high for a permanent solution to the fiscal problems. Later, as the domestic currency appreciates in real terms and the fiscal problems are not fully resolved, the credibility of the program falls, sometimes precipitously. This paper develops a political-economy model that focuses on the evolution of credibility over time, and is consistent with the pattern just described. Inflation inertia and costly budget negotiations play a key role in the model.

Series:

Working Paper No. 1992/073

Subject:

Currencies Exchange rates Fiscal consolidation Fiscal policy Foreign exchange Inflation Money Prices Public debt Real exchange rates

English

Publication Date:

September 1, 1992

ISBN/ISSN:

9781451958591/1018-5941

Stock No:

WPIEA0731992

Pages:

44

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