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Exchange-Rate-Based Stabilization under Imperfect Credibility
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 1991: Issue 077
Language:
English
Publication Date:
01 Aug 1991
DOI:
https://doi.org/10.5089/9781451849912.001
ISBN:
9781451849912
ISSN:
1018-5941
Pages:
34
Keywords:
WP; exchange rate; inflation rate; nominal interest rate; traded goods; home-goods sector; home goods; rate of inflation; output contraction; Consumption; Real exchange rates; Inflation; Real interest rates; Monetary base
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 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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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund