Disinflation and the supply side

Pierre-Richard Agénor and Lodovico Pizzati ()

No 2304, Policy Research Working Paper Series from The World Bank

Abstract: The authors study the dynamics of output, consumption, and real wages induced by a disinflation program based on permanent and temporary reductions in the nominal devaluation rate. They use an intertemporal optimizing model of a small open economy in which domestic households face imperfect world capital markets, the labor supply is endogenous, and wages are flexible. The model predicts that, with a constant capital stock and no investment, there is an initial reduction in real wages and output expands. Consumption falls on impact but increases afterward. In addition, with a temporary shock, a current account deficit emerges and, later a recession sets in, as documented in various studies. With endogenous capital accumulation, numerical simulations show that the model can also predict a boom in investment.

Keywords: Environmental Economics&Policies; Economic Theory&Research; Fiscal&Monetary Policy; Payment Systems&Infrastructure; Banks&Banking Reform; Economic Theory&Research; Environmental Economics&Policies; Banks&Banking Reform; Economic Growth; Fiscal&Monetary Policy (search for similar items in EconPapers)
Date: 2000-03-31
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Journal Article: Disinflation and the supply side (2005)
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