Supply-Side Effects of Disinflation Programs

July 1, 1994

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Jorge Roldos. Supply-Side Effects of Disinflation Programs, (USA: International Monetary Fund, 1994) accessed November 21, 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 focuses on the short-run and long-run supply-side effects of disinflation programs in a two-sector economy. Fixing the exchange rate reduces the wedge between the return on foreign assets and that on domestic capital, leading to an increase in the latter. After an initial real exchange rate appreciation and increase in the production of nontradables—due to a consumption boom—the new capital is gradually installed in the tradable sector. During this transitional period, further real appreciation takes place—as the expansion of the tradable sector pulls labor away from the nontradable sector—together with investment-driven deficits in the current account. We conclude that when appreciation and deficits are due to supply-side rigidities, rather than to credibility and/or price stickiness, no further policies (i.e., capital controls, incomes policies) are advisable.

Subject: External position, Financial institutions, Foreign assets, Foreign exchange, Labor, Labor supply, Real exchange rates, Stocks

Keywords: Capital goods, Capital K, Capital stock, Disinflation program, Eastern Europe, Factor of production, Foreign assets, Labor supply, Nominal exchange rate, Real exchange rates, Stocks, Supply response, Utility function, WP

Publication Details

Pages:

36
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1994/084
Stock No:

WPIEA0841994
ISBN:

9781451954425
ISSN:

1018-5941

Notes

Also published in Staff Papers, Vol. 42, No. 1, March 1995.

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