On Credible Disinflation

November 1, 1993

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

We study the effects of a credible, gradual exchange rate based disinflation program in a two sector economy. After an initial real exchange rate depreciation, the reductions in the rate of devaluation reduce the monetary wedge generated by a cash in advance constraint, leading to a gradual increase in absorption that yields progressive real exchange rate appreciations and current account deficits. An initial boom in economic activity is not followed by a later contraction, as labor supply expands during the whole length of the program.

Subject: Consumption, Disinflation, Foreign exchange, Inflation, Labor, Labor supply, National accounts, Prices, Real exchange rates

Keywords: Consumption, consumption opportunity, Disinflation, disinflation experiment, disinflation program, durable goods, economic activity, effect hinge, exchange rate, gradual disinflation, Inflation, inflation country, Labor supply, nominal interest rate, Real exchange rates, stabilization program, trade liberalization effort, utility function, WP

Pages:
26
Volume:
1993
DOI:
https://doi.org/10.5089/9781451851342.001
Issue:
090
Series:
Working Paper No. 1993/090
Stock No:
WPIEA0901993
ISBN:
9781451851342
ISSN:
1018-5941

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