On the Political Economy of Temporary Stabilization Programs

Laura Alfaro

Economics and Politics, 2002, vol. 14, issue 2, 133-161

Abstract: This paper provides a political economy explanation for temporary exchange‐rate‐based stabilization programs by focusing on the distributional effects of real exchange‐rate appreciation. I propose an economy in which agents are endowed with either tradable or non‐tradable goods. Under a cash‐in‐advance assumption, a temporary reduction in the devaluation rate induces a consumption boom accompanied by real appreciation, which hurts the owners of tradable goods. The owners of non‐tradables have to weigh two opposing effects: an increase in the present value of non‐tradable goods wealth and a negative intertemporal substitution effect. For reasonable parameter values, owners of non‐tradables are better off.

Date: 2002
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