Exchange-Rate-Based Stabilization, Durables Consumption, and Stylized Facts

Manoj Atolia () and Edward F. Buffie
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Edward F. Buffie: Indiana University

No 416, Computing in Economics and Finance 2006 from Society for Computational Economics

Abstract: In this paper we show that a model featuring durables consumption, weak credibility, and sticky prices can explain many of the stylized facts associated with exchange-rate-based stabilization, including the quantitative variation exhibited by key macroeconomic variables. In standard models, the boom phase of ERBS is nothing more than a tepid expansion - changes in spending, real output, and the real exchange rate are unexceptional. But when durables are part of the choice set, the boom is truly a boom: following a temporary reduction in the crawl, total consumption spending rises 12-20\%, the real exchange rate appreciates 40-55\%, and the current account deficit swells to 5-7\% of GDP. None of these results requires easy intertemporal substitution in consumption.

Keywords: Inflation; Exchange-Rate-Based-Stabilization; Durables (search for similar items in EconPapers)
JEL-codes: E3 E63 F41 (search for similar items in EconPapers)
Date: 2006-07-04
New Economics Papers: this item is included in nep-cba, nep-fmk, nep-ifn and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Exchange‐Rate‐based Stabilisation, Durables Consumption and the Stylised Facts (2011)
Working Paper: Exchange-Rate-Based Stabilization, Durables Consumption, and the Stylized Facts (2009)
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