Are Exchange Rate-Based Stabilizations Expansionary: Theoretical Considerations and the Brazilian Case

Gert Wehinger

Department of Economics Working Papers from Vienna University of Economics and Business, Department of Economics

Abstract: High inflation economies, especially the Latin American cases like Argentina and Brazil, have ultimately been successful in stabilising their prices using the exchange rate as a nominal anchor. Contrary to conventional wisdom inflation in these cases has not been reduced at the cost of temporary recessions, instead, they have shown positive output effects. Various theoretical explanations of such boom-cycles are discussed and a model generating such an outcome is developed. Some empirical evidence is given by the Brazilian "Real Plan" of 1994. Nevertheless, the medium and long-term effects of such programmes can result in recessions and a resumption of high inflation, although the cases show that such "postponed stabilisation costs" can be overcome by adequate and flexible supply-side policies accompanying the stabilisation programme.

Keywords: Macroeconomic modelling; exchange rate-based stabilisation; high inflation; Brazil, Latin America (search for similar items in EconPapers)
JEL-codes: E10 E31 E52 E63 (search for similar items in EconPapers)
Date: 1997-08
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Working Paper: Are exchange rate-based stabilisations expansionary? Theoretical considerations and the Brazilian case (1997)
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