Nominal interest rates, consumption booms, and lack of credibility: A quantitative examination

Carmen Reinhart and Carlos Vegh

MPRA Paper from University Library of Munich, Germany

Abstract: Exchange rate-based stabilization programs in chronic-inflation countries have often been accompanied by an initial expansion of private consumption followed by a contraction. This consumption cycle has been attributed to lack of credibility, in the sense that the public views the reduction in the devaluation rate as temporary. This paper assesses the quantitative relevance of the 'temporariness' hypothesis by comparing the predictions of a simple model to the actual figures for seven major programs. The paper concludes that nominal interest rates must fall substantially for the 'temporariness' hypothesis to account for an important fraction of the observed consumption booms.

Keywords: inflation; stabilization; credibility; consumption; booms; interest; rates; current; account; deficits (search for similar items in EconPapers)
JEL-codes: E21 E31 F30 F32 (search for similar items in EconPapers)
Date: 1995-04
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Citations: View citations in EconPapers (124)

Published in Journal of Development Econommics 2.46(1995): pp. 357-378

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Journal Article: Nominal interest rates, consumption booms, and lack of credibility: A quantitative examination (1995)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:13898

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