{
  "title": "Sticky Inflation and the Real Effects of Exchange Rate Based Stabilization",
  "publication": "IMF Working Papers, July 1, 2003",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2016/12/30/sticky-inflation-and-the-real-effects-of-exchange-rate-based-stabilization-16547",
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  "summary": "Exchange rate-based inflation stabilization (ERBS) policies are associated with a boom-recession cycle in economic activity and sustained real exchange rate appreciation.",
  "sections": [
    {
      "heading": "Overview and research question",
      "content": "- Author: Oya Celasun\n- Publication date: July 1, 2003\n- Series: Working Paper No. 2003/151\n- Pages: 34\n- Issue: 151\n- Volume: 2003\n- DOI: https://doi.org/10.5089/9781451857054.001\n- Stock No: WPIEA1512003\n- ISBN: 9781451857054\n- ISSN: 1018-5941\n- Core question: How does partial inflation stickiness affect the real dynamics (boom-recession cycle and real exchange rate appreciation) associated with exchange rate-based inflation stabilization (ERBS) when stabilization plans lack credibility?"
    },
    {
      "heading": "Empirical findings",
      "content": "- ERBS policies are associated with:\n  - a boom-recession cycle in economic activity\n  - sustained real exchange rate appreciation\n- Empirical test performed for Mexico and Turkey (two countries that have experienced ERBS).\n- Pricing behavior result:\n  - The forward- and backward-looking components of inflation weigh approximately equally in pricing behavior.\n  - Conclusion: inflation is partially sticky (i.e., neither perfectly forward-looking nor purely backward-looking)."
    },
    {
      "heading": "Theoretical implications developed in the paper",
      "content": "- Context: lack-of-credibility models of ERBS typically assume perfectly forward-looking pricing and no inflation stickiness, explaining slow inflation decline via a consumption boom driven by perceived temporariness of ERBS.\n- With partial inflation stickiness:\n  - The persistence of the consumption boom predicted by the lack-of-credibility model is significantly reduced.\n  - Partial stickiness helps explain the recession in the late phase of the stabilization."
    },
    {
      "heading": "Key themes and concepts",
      "content": "- Business cycles\n- Consumption dynamics\n- Credibility of stabilization plans\n- Disinflation and inflation stabilization\n- Inflation stickiness and inflation persistence\n- Exchange rate adjustments and real exchange rates\n- Excess demand and nontradables inflation dynamics\n- Application focus: Mexico, Turkey"
    },
    {
      "heading": "Principal conclusions",
      "content": "- Empirical evidence rejects the assumption of perfectly forward-looking pricing in the examined ERBS episodes; instead, inflation dynamics combine forward- and backward-looking behavior roughly equally.\n- Introducing partial inflation stickiness into lack-of-credibility ERBS models materially alters predicted real effects:\n  - It reduces the duration and persistence of consumption booms.\n  - It contributes to an explanation for the downturn (recession) observed in the late phase of ERBS episodes.\n\nImplied source: IMF Working Papers — Sticky Inflation and the Real Effects of Exchange Rate Based Stabilization, Oya Celasun, July 1, 2003, Working Paper No. 2003/151, DOI: https://doi.org/10.5089/9781451857054.001\n\n---\n\n Content in this bundle\n\n- Sticky Inflation and the Real Effects of Exchange Rate-Based Stabilization - WP/03/151\n  - Sticky Inflation and the Real Effects of Exchange Rate-Based Stabilization - WP/03/151 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Sticky Inflation and the Real Effects of Exchange Rate-Based Stabilization - WP/03/151 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2016/12/30/sticky-inflation-and-the-real-effects-of-exchange-rate-based-stabilization-16547"
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    "Authors: Oya Celasun",
    "Published: July 1, 2003",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781451857054.001",
    "Author: Oya Celasun",
    "Publication date: July 1, 2003",
    "Series: Working Paper No. 2003/151",
    "Pages: 34",
    "Issue: 151",
    "Volume: 2003",
    "DOI: https://doi.org/10.5089/9781451857054.001",
    "Stock No: WPIEA1512003",
    "ISBN: 9781451857054",
    "ISSN: 1018-5941",
    "Core question: How does partial inflation stickiness affect the real dynamics (boom-recession cycle and real exchange rate appreciation) associated with exchange rate-based inflation stabilization (ERBS) when stabilization plans lack credibility?",
    "ERBS policies are associated with:",
    "Empirical test performed for Mexico and Turkey (two countries that have experienced ERBS).",
    "Pricing behavior result:",
    "Context: lack-of-credibility models of ERBS typically assume perfectly forward-looking pricing and no inflation stickiness, explaining slow inflation decline via a consumption boom driven by perceived temporariness of ERBS.",
    "With partial inflation stickiness:",
    "Business cycles",
    "Consumption dynamics",
    "Credibility of stabilization plans",
    "Disinflation and inflation stabilization",
    "Inflation stickiness and inflation persistence",
    "Exchange rate adjustments and real exchange rates",
    "Excess demand and nontradables inflation dynamics",
    "Application focus: Mexico, Turkey",
    "Empirical evidence rejects the assumption of perfectly forward-looking pricing in the examined ERBS episodes; instead, inflation dynamics combine forward- and backward-looking behavior roughly equally.",
    "Introducing partial inflation stickiness into lack-of-credibility ERBS models materially alters predicted real effects:",
    "**Sticky Inflation and the Real Effects of Exchange Rate-Based Stabilization - WP/03/151**"
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