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Inflation Stabilization And Nominal Anchors

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  • GUILLERMO A. CALVO
  • CARLOS A. VÉGH

Abstract

This paper analyzes the choice of a nominal anchor in disinflation programs in chronic inflation countries. Both theory and evidence suggest several conclusions. (i) The recessionary effects associated with disinflation appear in the early stages of money-based programs but only in the late stages of exchange rate-based programs. (ii) Lack of credibility is more disruptive under fixed exchange rates than under floating exchange rates. (iii) Attempting to pursue a disinflationary policy while maintaining a given level of the real exchange rate is likely to be self-defeating. (iv) A high degree of currency substitution favors the exchange rate as the nominal anchor. Copyright 1994 Western Economic Association International.

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Bibliographic Info

Article provided by Western Economic Association International in its journal Contemporary Economic Policy.

Volume (Year): 12 (1994)
Issue (Month): 2 (04)
Pages: 35-45

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Handle: RePEc:bla:coecpo:v:12:y:1994:i:2:p:35-45

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