Exchange-Rate-Based Stabilization under Imperfect Credibility
August 1, 1991
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Summary
This paper analyzes stabilization policy under predetermined exchange rates in a cash-in-advance, staggered-prices model. Under full credibility, a reduction in the rate of devaluation results in an immediate and permanent reduction in the inflation rate, with no effect on output or consumption. In contrast, a non-credible stabilization results in an initial expansion of output, followed by a later recession. The inflation rate of home goods remains above the rate of devaluation throughout the program, thus resulting in a sustained real exchange rate appreciation.
Subject: Consumption, Financial services, Foreign exchange, Inflation, Monetary base, Money, National accounts, Prices, Real exchange rates, Real interest rates
Keywords: Consumption, exchange rate, home goods, home-goods sector, Inflation, inflation rate, Monetary base, nominal interest rate, output contraction, rate of inflation, Real exchange rates, Real interest rates, traded goods, WP
Pages:
34
Volume:
1991
DOI:
Issue:
077
Series:
Working Paper No. 1991/077
Stock No:
WPIEA0771991
ISBN:
9781451849912
ISSN:
1018-5941
