publication . Preprint . 1991

Exchange-Rate-Based Stabilization under Imperfect Credibility

Guillermo Calvo; Carlos A. Végh Gramont;
Open Access
  • Published: 01 Aug 1991
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.
free text keywords: Inflation;exchange rate, real exchange rate, inflation rate, nominal interest rate
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