Losing Credibility: The Stabilization Blues

Pablo Guidotti and Carlos Végh Gramont

No 1992/073, IMF Working Papers from International Monetary Fund

Abstract: In exchange rate-based stabilization programs, credibility often follows a distinct time pattern. At first it rises as the highly visible nominal anchor provides a sense of stability and hopes run high for a permanent solution to the fiscal problems. Later, as the domestic currency appreciates in real terms and the fiscal problems are not fully resolved, the credibility of the program falls, sometimes precipitously. This paper develops a political-economy model that focuses on the evolution of credibility over time, and is consistent with the pattern just described. Inflation inertia and costly budget negotiations play a key role in the model.

Keywords: WP; balance of payments; exchange rate; nominal interest rate; balance of payments crisis; step devaluation; real appreciation; devaluation rate; nominal devaluation; expected devaluation; Real exchange rates; Exchange rates; Inflation; Fiscal consolidation; Currencies (search for similar items in EconPapers)
Pages: 44
Date: 1992-09-01
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Citations: View citations in EconPapers (12)

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Related works:
Journal Article: Losing Credibility: The Stabilization Blues (1999)
Working Paper: Losing Credibility: The Stabilization Blues (1997)
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