Exchange rate stabilization under imperfect credibility

Guillermo Calvo and Carlos Vegh

MPRA Paper from University Library of Munich, Germany

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: Monetary policy; exchange rate policy; inflation stabilization; credibility (search for similar items in EconPapers)
JEL-codes: F41 (search for similar items in EconPapers)
Date: 1991-08
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Citations: View citations in EconPapers (17)

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