Exchange-Rate-Based Stabilization under Imperfect Credibility

Guillermo Calvo and Carlos Végh Gramont

No 1991/077, IMF Working Papers from International Monetary Fund

Abstract: This paper analyzes stabilization policy under predetermined exchange rates in a cash-in-advance, staggered-prices model. Under full credibility, a reduction in the rate of devaluation results in an immediate and permanent reduction in the inflation rate, with no effect on output or consumption. In contrast, a non-credible stabilization results in an initial expansion of output, followed by a later recession. The inflation rate of home goods remains above the rate of devaluation throughout the program, thus resulting in a sustained real exchange rate appreciation.

Keywords: WP; exchange rate; inflation rate; nominal interest rate; traded goods; home-goods sector; home goods; rate of inflation; output contraction; Consumption; Real exchange rates; Inflation; Real interest rates; Monetary base (search for similar items in EconPapers)
Pages: 34
Date: 1991-08-01
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Citations: View citations in EconPapers (40)

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Chapter: Exchange-Rate Based Stabilisation under Imperfect Credibility (1993)
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