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The Capital Inflows Problem Revisited: A Stylized Model of Southern Cone Disinflation

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  • Obstfeld, Maurice

Abstract

In the late 1970s countries in Latin America's Southern Cone attempted to lower domestic inflation rates through the progressive reduction of a preannounced rate of exchange-rate devaluation. The stabilization programs gave rise to massive capital inflows, real exchange-rate appreciation, and current-account deficits. This paper develops a stylized intertemporal framework in which the effects of a preannounced exchange-rate oriented disinflation scheme can be studied. It is shown that even when agents have perfect foresight and markets clear continuously, the "capital inflows" problem and the associated real appreciation may result.While unanticipated, permanent inflation changes are neutral in the paper,anticipated inflation is neutral only in exceptional circumstances. A preannounced disinflation operates by altering the path of an expenditure -based real domestic interest rate that depends on expected changes in the prices of liquidity services and nontradable consumption goods. Alternatively, by raising future real balances, anticipated disinflation may cause an incipient change in the time path of consumption's marginal utility, leading agents to revise consumption plans. It is noteworthy that disinflation's long-run effect on the real exchange rate more than reverses its short-run effect. If disinflation occasions a real appreciation on impact, say, the relative price of tradables must rise in the long run so that the economy can service the additional external debt incurred in the transition period.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Review of Economic Studies.

Volume (Year): 52 (1985)
Issue (Month): 4 (October)
Pages: 605-25

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Handle: RePEc:bla:restud:v:52:y:1985:i:4:p:605-25

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Cited by:
  1. James M. Poterba & Julio J. Rotemberg, 1986. "Money in the Utility Function: An Empirical Implementation," NBER Working Papers 1796, National Bureau of Economic Research, Inc.
  2. Amartya Lahiri, 1996. "Macroeconomic Effects of Devaluation Rate Changes: Dynamic implications under alternative regimes of capital mobility," UCLA Economics Working Papers 760, UCLA Department of Economics.
  3. Vegh, Carlos, 1991. "Stopping High Inflation: An Analytical Overview," MPRA Paper 20175, University Library of Munich, Germany.
  4. Kiguel, Miguel & Liviatan, Nissan, 1990. "The business cycle associated with exchange-rate-based stabilization," Policy Research Working Paper Series 513, The World Bank.
  5. Kiminori Matsuyama, 1989. "Complicated Topological Structure of the Set of Equilibrium Prices," Discussion Papers 826, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  6. Martin Uribe, 1995. "Exchange-rate based inflation stabilization: the initial real effects of credible plans," International Finance Discussion Papers 503, Board of Governors of the Federal Reserve System (U.S.).
  7. Guillermo A. Calvo & Carlos A. Vegh, 1999. "Inflation Stabilization and BOP Crises in Developing Countries," NBER Working Papers 6925, National Bureau of Economic Research, Inc.
  8. Kiguel, Miguel A. & Liviatan, Nissan, 1988. "Inflationary rigidities and stabilization policies," Policy Research Working Paper Series 4, The World Bank.
  9. Martin Uribe, 1997. "Habit formation and the comovement of prices and consumption during exchange-rate based stabilization programs," International Finance Discussion Papers 598, Board of Governors of the Federal Reserve System (U.S.).
  10. Lahiri, Amartya, 2001. "Exchange rate based stabilizations under real frictions: The role of endogenous labor supply," Journal of Economic Dynamics and Control, Elsevier, vol. 25(8), pages 1157-1177, August.
  11. Timothy J Condon, 1986. "Flujo de Comercio y la Política del Tipo de Cambio Reptante: Un Modelo de Predicción Perfecta de Largo Plazo," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 23(68), pages 25-48.
  12. Reinhart, Carmen & Vegh, Carlos, 1994. "Intertemporal consumption substitution and inflation stabilization:An empirical investigation," MPRA Paper 13427, University Library of Munich, Germany.
  13. Agenor, Pierre-Richard & Lodovico, Pizzati, 2000. "Disinflation and the supply side," Policy Research Working Paper Series 2304, The World Bank.
  14. Reinhart, Carmen & Vegh, Carlos, 1994. "Inflation stabilization in chronic inflation countries: The empirical evidence," MPRA Paper 13689, University Library of Munich, Germany.
  15. Amartya Lahiri, 1996. "Disinflation Programs Under Policy Uncertainty: Insights for Exchange-Rate-Based Stabilization Programs," UCLA Economics Working Papers 761, UCLA Department of Economics.
  16. Steven F. Venti & David A. Wise, 1987. "IRAs and Saving," NBER Chapters, in: The Effects of Taxation on Capital Accumulation, pages 7-52 National Bureau of Economic Research, Inc.
  17. Leonardo Hernández, 1991. "Credibilidad, Problema Peso y Comportamiento de las Tasas de Interés: Chile 1979-1982," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 28(85), pages 385-410.
  18. Liviatan, Nissan, 1988. "Israel's stabilization program," Policy Research Working Paper Series 91, The World Bank.
  19. Kiminori Matsuyama, 1989. "Serial Correlation of Sunspot Equilibria (Rational Bubbles) in Two Popular Models of Monetary Economies," Discussion Papers 827, Northwestern University, Center for Mathematical Studies in Economics and Management Science.

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