Credibility and the Dynamics of Stabilization Policy: A Basic Framework
November 1, 1990
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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.
Subject: Consumption, Exchange rate flexibility, Financial services, Foreign exchange, Inflation, National accounts, Prices, Real exchange rates, Real interest rates
Keywords: Consumption, exchange rate, Exchange rate flexibility, home goods, home-goods market equilibrium, home-goods sector, Inflation, inflation rate, rate of inflation, Real exchange rates, Real interest rates, stabilization program, tradable goods, WP
Pages:
48
Volume:
1990
DOI:
Issue:
110
Series:
Working Paper No. 1990/110
Stock No:
WPIEA1101990
ISBN:
9781451945584
ISSN:
1018-5941
