Exchange-Rate-Based Stabilization under Imperfect Credibility [electronic resource] / Guillermo Calvo.
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TextSeries: IMF Working Papers; Working Paper ; No. 91/77Publication details: Washington, D.C. : International Monetary Fund, 1991Description: 1 online resource (34 p.)ISBN: 1451849915 :ISSN: 1018-5941Subject(s): Exchange Rate | Inflation Rate | Nominal Interest Rate | Real Exchange Rate | Argentina | Chile | Israel | UruguayAdditional physical formats: Print Version:: Exchange-Rate-Based Stabilization under Imperfect CredibilityOnline resources: IMF e-Library | IMF Book Store 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.
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.
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