Exchange-Rate-Based Stabilization under Imperfect Credibility

Author/Editor:

Guillermo Calvo ; Carlos A. Végh Gramont

Publication Date:

August 1, 1991

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

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.

Series:

Working Paper No. 1991/077

Subject:

Consumption Financial services Foreign exchange Inflation Monetary base Money National accounts Prices Real exchange rates Real interest rates

English

Publication Date:

August 1, 1991

ISBN/ISSN:

9781451849912/1018-5941

Stock No:

WPIEA0771991

Pages:

34

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