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Exchange-Rate-Based Stabilization, Durables Consumption, and the Stylized Facts

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Author Info
Edward F. Buffie () (Department of Economics, Indiana University)
Manoj Atolia () (Department of Economics, Florida State University)

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Abstract

In this paper we show that a model featuring durables consumption, weak credibility, and sticky prices can explain many of the stylized facts associated with exchange-rate-based stabilization, including the quantitative variation exhibited by key macroeconomic variables. In standard models, the boom phase of ERBS is nothing more than a tepid expansion – changes in spending, real output, and the real exchange rate are unexceptional. But when durables are part of the choice set, the boom is truly a boom: following a temporary reduction in the crawl, total consumption spending rises 12-20%, the real exchange rate appreciates 40-55%, and the current account deficit swells to 5-7% of GDP. None of these results requires easy intertemporal substitution in consumption.

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File URL: ftp://econpapers.fsu.edu/RePEc/fsu/wpaper/wp2005_12_01.pdf
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Paper provided by Department of Economics, Florida State University in its series Working Papers with number wp2005_12_01.

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Length: 47
Date of creation: Dec 2005
Date of revision: Jan 2009
Handle: RePEc:fsu:wpaper:wp2005_12_01

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Related research
Keywords: Reverse Shooting; Global Nonlinear Saddlepath Solution;

Find related papers by JEL classification:
C63 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Computational Techniques
C61 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Optimization Techniques; Programming Models; Dynamic Analysis

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    Other versions:
  5. Steven B. Kamin & Neil R. Ericsson, 1993. "Dollarization in Argentina," International Finance Discussion Papers 460, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  21. Mendoza, Enrique & Uribe, Martin, 1997. "The Syndrome of Exchange-Rate-Based Stabilizations and the Uncertain Duration of Currency Pegs," Working Papers 97-30, Duke University, Department of Economics. [Downloadable!]
    Other versions:
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