Intertemporal consumption substitution and inflation stabilization:An empirical investigation

Carmen Reinhart and Carlos Vegh

MPRA Paper from University Library of Munich, Germany

Abstract: Exchange rate based inflation stabilization programs in developing countries often lead to an initial consumption boom followed by an eventual recession. To explain such phenomenon, theoretical models have focused on the role of intertemporal consumption substitution in response to temporary reductions in nominal interest rates. This paper assesses the empirical relevance of such mechanism for six high-inflation developing countries that have gone through repeated stabilization attempts. A simple monetary model is used to obtain estimates of the intertemporal elasticity of substitution, and dynamics simulations are carried out to test the predictive power of the model. The analysis concludes that, in several cases, temporary shocks appeared to have played a key role in generating a consumption boom.

Keywords: inflation; consumption; boom; stabilization; interest; rates (search for similar items in EconPapers)
JEL-codes: E21 F32 (search for similar items in EconPapers)
Date: 1994
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Citations: View citations in EconPapers (36)

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Related works:
Working Paper: Do Exchange Rate-Based Stabilizations Carry the Seeds of Their Own Destruction? (1999)
Working Paper: Inflation stabilization in chronic inflation countries: The empirical evidence (1994)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:13427

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