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Two Crises: Inflationary Inertia and Credibility

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  • Edwards, Sebastian

Abstract

This paper provides a comparative analysis of the Mexican currency crisis of 1994 and the Chilean crisis of 1982 to assess to what extent exchange-rate-based stabilization programs are successful in reducing--or even eliminating--inflationary inertia. The paper provides a brief overview of the Chilean and Mexican reform and stabilization programs. A theoretical model that emphasizes the role of credibility is developed to analyze the effects of exchange-rate based stabilization programs on inflationary inertia. According to the model, less than credible stabilizations will not eliminate inertia and will generate major real exchange rate overvaluation. Detailed data are used to test the hypothesis.

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Bibliographic Info

Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 108 (1998)
Issue (Month): 448 (May)
Pages: 680-702

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Handle: RePEc:ecj:econjl:v:108:y:1998:i:448:p:680-702

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Cited by:
  1. Augustine Arize & John Malindretos & Kiseok Nam, 2005. "Inflation and Structural Change in 50 Developing Countries," Atlantic Economic Journal, International Atlantic Economic Society, vol. 33(4), pages 461-471, December.
  2. Jose Sanchez-Fung, 2004. "Inflation targeting and monetary analysis in Chile and Mexico," Money Macro and Finance (MMF) Research Group Conference 2003 82, Money Macro and Finance Research Group.
  3. Sebastian Edwards, 2011. "Exchange-Rate Policies in Emerging Countries: Eleven Empirical Regularities From Latin America and East Asia," Open Economies Review, Springer, vol. 22(4), pages 533-563, September.
  4. Raphael Bergoeing & Patrick J. Kehoe & Timothy J. Kehoe & Raimundo Soto, 2002. "Decades lost and found: Mexico and Chile since 1980," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 3-30.
  5. Sebastian Edwards, 2006. "The Relationship Between Exchange Rates and Inflation Targeting Revisited," Working Papers Central Bank of Chile 409, Central Bank of Chile.
  6. Sebastián Edwards, 2007. "The Relationship between Exchange Rates and Inflation Targeting Revisited," Central Banking, Analysis, and Economic Policies Book Series, in: Frederic S. Miskin & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Se (ed.), Monetary Policy under Inflation Targeting, edition 1, volume 11, chapter 10, pages 373-413 Central Bank of Chile.
  7. Dias, Daniel & Robalo Marques, Carlos, 2005. "Using mean reversion as a measure of persistence," Working Paper Series 0450, European Central Bank.
  8. Sebastian Edwards, 2001. "Exchange Rate Regimes, Capital Flows and Crisis Prevention," NBER Working Papers 8529, National Bureau of Economic Research, Inc.
  9. Henry, Olan T. & Shields, Kalvinder, 2004. "Is there a unit root in inflation?," Journal of Macroeconomics, Elsevier, vol. 26(3), pages 481-500, September.
  10. Çiçek, Serkan & Akar, Cüneyt, 2013. "The asymmetry of inflation adjustment in Turkey," Economic Modelling, Elsevier, vol. 31(C), pages 104-118.
  11. Sebastian Edwards, 2011. "Exchange Rates in Emerging Countries: Eleven Empirical Regularities from Latin America and East Asia," NBER Working Papers 17074, National Bureau of Economic Research, Inc.

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