IMF Working Papers

Losing Credibility: The Stabilization Blues

By Pablo Emilio Guidotti, Carlos A. Végh Gramont

September 1, 1992

Preview Citation

Format: Chicago

Pablo Emilio Guidotti, and Carlos A. Végh Gramont Losing Credibility: The Stabilization Blues, (USA: International Monetary Fund, 1992) accessed December 25, 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

In exchange rate-based stabilization programs, credibility often follows a distinct time pattern. At first it rises as the highly visible nominal anchor provides a sense of stability and hopes run high for a permanent solution to the fiscal problems. Later, as the domestic currency appreciates in real terms and the fiscal problems are not fully resolved, the credibility of the program falls, sometimes precipitously. This paper develops a political-economy model that focuses on the evolution of credibility over time, and is consistent with the pattern just described. Inflation inertia and costly budget negotiations play a key role in the model.

Subject: Currencies, Exchange rates, Fiscal consolidation, Fiscal policy, Foreign exchange, Inflation, Money, Prices, Public debt, Real exchange rates

Keywords: Balance of payments, Balance of payments crisis, Currencies, Devaluation rate, Exchange rate, Exchange rates, Expected devaluation, Fiscal consolidation, Inflation, Nominal devaluation, Nominal interest rate, Real appreciation, Real exchange rates, Step devaluation, WP

Publication Details

  • Pages:

    44

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 1992/073

  • Stock No:

    WPIEA0731992

  • ISBN:

    9781451958591

  • ISSN:

    1018-5941

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