Credibility and the Dynamics of Stabilization Policy: A Basic Framework

Author/Editor:

Guillermo Calvo ; Carlos A. Végh Gramont

Publication Date:

November 1, 1990

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:

This paper studies price stabilization policy under both predetermined and flexible exchange rates. Under predetermined exchange rates, a non-credible stabilization program results in an initial expansion of output, followed by a later recession. The initial expansion accompanies an appreciating real exchange rate. Under flexible exchange rates, the recession occurs at the beginning of the program. The real exchange rate appreciates sharply on impact but depreciates afterwards. Lack of credibility is more costly under predetermined exchange rates because the real effects are more pronounced.

Series:

Working Paper No. 1990/110

Subject:

Consumption Exchange rate flexibility Financial services Foreign exchange Inflation National accounts Prices Real exchange rates Real interest rates

English

Publication Date:

November 1, 1990

ISBN/ISSN:

9781451945584/1018-5941

Stock No:

WPIEA1101990

Pages:

48

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