Exchange-Rate-Based Stabilization under Imperfect Credibility

By Guillermo Calvo, Carlos A. Végh Gramont

August 1, 1991

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Guillermo Calvo, and Carlos A. Végh Gramont Exchange-Rate-Based Stabilization under Imperfect Credibility, (USA: International Monetary Fund, 1991) accessed December 26, 2024

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

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

Publication Details

Pages:

34
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1991/077
Stock No:

WPIEA0771991
ISBN:

9781451849912
ISSN:

1018-5941

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