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Nominal interest rates, consumption booms, and lack of credibility: A quantitative examination

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  • Reinhart, Carmen M.
  • Vegh, Carlos A.

Abstract

Exchange rate-based stabilization programs in chronic-inflation countries have often been accompanied by an initial expansion of private consumption followed by a contraction. This consumption cycle has been attributed to lack of credibility, in the sense that the public views the reduction in the devaluation rate as temporary. This paper assesses the quantitative relevance of the 'temporariness' hypothesis by comparing the predictions of a simple model to the actual figures for seven major programs. The paper concludes that nominal interest rates must fall substantially for the 'temporariness' hypothesis to account for an important fraction of the observed consumption booms.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Development Economics.

Volume (Year): 46 (1995)
Issue (Month): 2 (April)
Pages: 357-378

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Handle: RePEc:eee:deveco:v:46:y:1995:i:2:p:357-378

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References

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  1. Jorge Roldos, 1993. "On Credible Disinflation," IMF Working Papers 93/90, International Monetary Fund.
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  4. Arrau, Patricio & De Gregorio, Jose & Reinhart, Carmen M. & Wickham, Peter, 1995. "The demand for money in developing countries: Assessing the role of financial innovation," Journal of Development Economics, Elsevier, vol. 46(2), pages 317-340, April.
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  8. N. Gregory Mankiw, 1985. "Consumer Durables and the Real Interest Rate," NBER Working Papers 1148, National Bureau of Economic Research, Inc.
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  10. Fauvel, Y. & Samson, L., 1989. "Intertemporal Substitution And Durable Goods: An Empircal Analysis," Cahiers de recherche 8916, Université Laval - Département d'économique.
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  12. Carlos A. Végh Gramont & Guillermo Calvo, 1993. "Stabilization Dynamics and Backward-Looking Contracts," IMF Working Papers 93/29, International Monetary Fund.
  13. Reinhart, Vincent, 1990. "Targeting Nominal Income in a Dynamic Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 22(4), pages 427-43, November.
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  17. Rossi, JoseW., 1989. "The demand for money in Brazil : What happened in the 1980s?," Journal of Development Economics, Elsevier, vol. 31(2), pages 357-367, October.
  18. Reinhart, Carmen & Vegh, Carlos, 1994. "Intertemporal consumption substitution and inflation stabilization:An empirical investigation," MPRA Paper 13427, University Library of Munich, Germany.
  19. Eckstein, Z. & Leiderman, L., 1991. "Seignorage and the Welfare Cost of Inflation; Evidence from an Intertemporal Model of Money and Consumption," Papers 7-91, Tel Aviv.
  20. Kimbrough, Kent P., 1992. "Speculative attacks: The roles of intertemporal substitution and the interest elasticity of the demand for money," Journal of Macroeconomics, Elsevier, vol. 14(4), pages 689-710.
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  22. Calvo, Guillermo A, 1986. "Temporary Stabilization: Predetermined Exchange Rates," Journal of Political Economy, University of Chicago Press, vol. 94(6), pages 1319-29, December.
  23. Rodriguez, Carlos Alfredo, 1982. "The Argentine stabilization plan of December 20th," World Development, Elsevier, vol. 10(9), pages 801-811, September.
  24. Reinhart, Carmen & Ostry, Jonathan, 1992. "Saving and Terms of Trade Shocks: Evidence from Developing Countries," MPRA Paper 6976, University Library of Munich, Germany.
  25. Kiguel, Miguel A & Liviatan, Nissan, 1992. "The Business Cycle Associated.with Exchange Rate-Based Stabilizations," World Bank Economic Review, World Bank Group, vol. 6(2), pages 279-305, May.
  26. Ceglowski, Janet, 1991. "Intertemporal substitution in import demand," Journal of International Money and Finance, Elsevier, vol. 10(1), pages 118-130, March.
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