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We are grateful for comments to Sandy Mackenzie, Saúl Lizondo, Lorenzo Pérez, Frits van Beek and Ruby Randall. All remaining errors are our own.
In the context of neoclassical growth models, Tobin (1965) finds a positive effect of inflation on economic activity, as it encourages a portfolio shift from real balances to capital. This result depends critically on an exogenous savings rate.
Seigniorage in percent of GDP was calculated as S = ΔM/PY, where M denotes base money and PY denotes nominal GDP. High values in 1994 and 1995 will be explained below with gold purchases (1994) and a rapid remonetization of the economy (1995) after high inflation.
The lack of reliable data unfortunately prevents a complete examination of the list of variables in Rebelo and Végh (1996).
De Gregorio, Guidotti and Végh (1998) point out that most of the variation in consumption during stabilizations/high inflations stems from variations in durable goods. Unfortunately, the data on Suriname do not allow for a detailed analysis of the structure of total consumption.
The internal real exchange rate was calculated as the ratio of tradable goods prices (food and clothing) in the CPI to non-tradable goods prices (housing and services.). This measure of the real exchange rate has several advantages. First it is closer to the theoretical concept used later, which defines the real exchange rate as a domestic relative price. Second, it is almost impossible in Suriname to calculate a “real effective exchange rate” according to standard IMF practices, due to the pervasive use of multiple exchange rates.
Calvo, Reinhart and Végh (1995) show that the reverse causality applies to real exchange rate targeting. An attempt by the government to lower the real exchange rate in order to promote exports can result in accelerating inflation.
Following the macroeconomic convention, the exchange rate E is defined as the price of one unit of foreign currency in domestic terms. An increase in E means a devaluation of the currency.
It would be more realistic to treat transaction costs as consumption of resources that does not yield utility. Introducing them into the non-traded goods equilibrium and the current account - equations (13) and (14) below - would not change the results of the model. For a complete characterization of the basic effects of inflation, see Rebelo and Végh (1996).
For a description of this model, see e.g. the textbook by Markusen and Melvin (1990), and for a more thorough treatment of the algebra see Wong (1995). The recent stabilization literature, exemplified by Uribe (1997), Rebelo and Végh (1996) and Roldós (1995), frequently uses two-factor-two-sector models. However, these authors assume that capital is sector specific. Their production side is therefore similar to the Ricardo-Viner model and differs from the Heckscher-Ohlin-Samuelson structure sketched here.