The Behavior of Real Interest Rates in Exchange‐Rate‐Based Stabilization Programs

Pierre-Richard Agénor

Review of Development Economics, 1998, vol. 2, issue 3, 231-249

Abstract: This paper examines the behavior of real interest rates at the inception of exchange‐rate‐based stabilization programs. The analysis is based on an optimizing model of a small open economy facing imperfect world capital markets. A reduction in the devaluation rate is shown to have a positive impact on real interest rates. By contrast, a program characterized by an initial reduction in the devaluation rate and a perceived future increase in government spending has an ambiguous effect—which depends in particular on the degree of credibility of the fiscal policy stance.

Date: 1998
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