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Credibility and the Dynamics of Stabilization Policy: A Basic Framework
Author:
Mr. Guillermo Calvo null

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Mr. Carlos A. Végh Gramont null

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Series:
IMF Working Papers
Volume/Issue:
Volume 1990: Issue 110
Language:
English
Publication Date:
01 Nov 1990
DOI:
https://doi.org/10.5089/9781451945584.001
ISBN:
9781451945584
ISSN:
1018-5941
Pages:
48
Keywords:
WP; exchange rate; inflation rate; tradable goods; home goods; home-goods sector; stabilization program; rate of inflation; home-goods market equilibrium; Real exchange rates; Consumption; Inflation; Real interest rates; Exchange rate flexibility
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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This paper studies price stabilization policy under both predetermined and flexible exchange rates. Under predetermined exchange rates, a non-credible stabilization program results in an initial expansion of output, followed by a later recession. The initial expansion accompanies an appreciating real exchange rate. Under flexible exchange rates, the recession occurs at the beginning of the program. The real exchange rate appreciates sharply on impact but depreciates afterwards. Lack of credibility is more costly under predetermined exchange rates because the real effects are more pronounced.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund