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Losing Credibility: The Stabilization Blues

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  • Guidotti, Pablo E
  • Vegh, Carlos A

Abstract

In exchange rate-based stabilization programs, credibility often follows a distinct time pattern. At first it rises as the highly visible nominal anchor provides a sense of stability and hopes run high for a permanent solution to fiscal problems. Later, as the domestic currency appreciates in real terms and the fiscal problems are not fully resolved, the credibility of the program falls, sometimes precipitously. This paper develops a political-economy model that focuses on the evolution of credibility over time, and is consistent with the pattern just described. Inflation inertia and costly budget negotiations play a key role. Copyright 1999 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

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Bibliographic Info

Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

Volume (Year): 40 (1999)
Issue (Month): 1 (February)
Pages: 23-51

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Handle: RePEc:ier:iecrev:v:40:y:1999:i:1:p:23-51

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Cited by:
  1. Mariano Tommasi & Guillermo Mondino & Federico Sturzenegger, 1995. "Recurrent High Inflation and Stabilization: A Dynamic Game," Working Papers 10, Universidad de San Andres, Departamento de Economia, revised Nov 1996.
  2. Pastine, Ivan, 2001. "Speculation and the Decision to Abandon a Fixed Exchange Rate Regime," CEPR Discussion Papers 2893, C.E.P.R. Discussion Papers.
  3. Cesar Martinelli & Raul Escorza, 2004. "When Are Stabilizations Delayed? Alesina-Drazen Revisited," Working Papers 0408, Centro de Investigacion Economica, ITAM.
  4. Amartya Lahiri & Carlos A. Vegh, 2000. "Delaying the Inevitable: Optimal Interest Rate Policy and BOP Crises," NBER Working Papers 7734, National Bureau of Economic Research, Inc.
  5. Faruk Selcuk & Ramazan Gencay, 2001. "Overnight Borrowing, Interest Rates and Extreme Value Theory," Departmental Working Papers 0103, Bilkent University, Department of Economics.
  6. Cesar Martinelli, 2001. "Essays on Political Economy of Political Reform," Levine's Working Paper Archive 625018000000000135, David K. Levine.
  7. Lahiri, Amartya, 2000. "Disinflation programs under policy uncertainty," Journal of International Economics, Elsevier, vol. 50(2), pages 351-373, April.
  8. Yougbaré, Lassana, 2011. "Exchange rate arrangements and misalignments: contrasting words and deeds," MPRA Paper 32362, University Library of Munich, Germany.

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