Devaluation Risk and the Syndrome of Exchange-Rate-Based Stabilizations

Enrique Mendoza and Martín Uribe (mu2166@columbia.edu)

No 7014, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper shows that the risk of devaluation can be an important factor accounting for the stylized facts of exchange-rate-based stabilizations. This conclusion follows from studying the quantitative implications of a two-sector equilibrium business cycle model of a small open economy calibrated to Mexico's 1987-1994 stabilization plan. In the model a time-variant interest rate differential that acts as a stochastic tax on money demand, labor supply, investment, and saving. Under incomplete markets, this tax induces endogenous state-contingent wealth effects via fiscal adjustment and suboptimal investment. Devaluation risk entails large welfare costs in this environment.

JEL-codes: F31 F32 (search for similar items in EconPapers)
Date: 1999-03
New Economics Papers: this item is included in nep-ifn and nep-pol
Note: IFM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

Published as Carnegie-Rochester Conference Series on Public Policy, Vol. 53 (2000),forthcoming.

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