Temporary Stabilizations, Sudden Stops, and Asset Prices

Rajesh Singh and Chetan Subramanian

Review of Development Economics, 2009, vol. 13, issue 2, pages 333-347

Abstract: The authors study a temporary exchange-rate based stabilization plan in which agents face a sudden stop of capital inflows. The model generates a rising path of real interest rates in advance of the exchange rate collapse. This generates a time-dependent non-monotonic path of required premium on domestic assets. The model-generated asset price dynamics closely mimic their empirical counterpart, as witnessed during recent collapses of exchange-rate based stabilization plans. The model also reproduces consumption and foreign reserve dynamics that closely mimic the data. Copyright © 2009 The Authors. Journal compilation © 2009 Blackwell Publishing Ltd.

Date: 2009

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