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Abstract
This paper studies an experiment in which the Central Bank sets the rate of devaluation at a level consistent with other fiscal constraints and reverts to a targets-consistent rate of devaluation when the reserves constraint is binding. The results confirm previous findings: as soon as the inconsistent policy is announced, absorption increases, the current account deficit widens, and the real exchange rate appreciates. Once the crisis occurs the system returns to a steady state with a higher real exchange rate. During the transition, the current account deficit is wider and the exchange rate appreciates more, the more ambitious the (inconsistent) stabilization program is.
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