On Credible Disinflation

Author/Editor:

Jorge Roldos

Publication Date:

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.

Series:

Working Paper No. 93/90

Subject:

English

Publication Date:

November 1, 1993

ISBN/ISSN:

9781451851342/1018-5941

Stock No:

WPIEA0901993

Format:

Paper

Pages:

26

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