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Losing Credibility: The Stabilization Blues

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  • Pablo Emilio Guidotti
  • Carlos A. Végh Gramont

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

Paper provided by International Monetary Fund in its series IMF Working Papers with number 92/73.

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Length: 48
Date of creation: 01 Sep 1992
Date of revision:
Handle: RePEc:imf:imfwpa:92/73

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Related research

Keywords: Stabilization programs; Exchange rates; Economic models;

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Cited by:
  1. Chang, Roberto, 2001. "Commitment, coordination failures, and delayed reforms," Journal of Monetary Economics, Elsevier, vol. 47(1), pages 123-144, February.
  2. Cesar Martinelli, 2001. "Essays on Political Economy of Political Reform," Levine's Working Paper Archive 625018000000000135, David K. Levine.
  3. Mondino, Guillermo & Sturzenegger, Federico & Tommasi, Mariano, 1996. "Recurrent High Inflation and Stabilization: A Dynamic Game," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(4), pages 981-96, November.
  4. Pastine, Ivan, 2002. "Speculation and the decision to abandon a fixed exchange rate regime," Journal of International Economics, Elsevier, vol. 57(1), pages 197-229, June.
  5. Persson, T., 1992. "Politics and Economic Policy," Papers 518, Stockholm - International Economic Studies.
  6. César Martinelli & Raúl Escorza, 2005. "When Are Stabilizations Delayed? Alesina-Drazen Revisited," Levine's Bibliography 122247000000000667, UCLA Department of Economics.
  7. Sebastian Galiani & Daniel Heymann & Mariano Tommasi, 2002. "Missed Expectations: The Argentine Convertibility," William Davidson Institute Working Papers Series 515, William Davidson Institute at the University of Michigan.
  8. Maurice Obstfeld, 1994. "The Logic of Currency Crises," NBER Working Papers 4640, National Bureau of Economic Research, Inc.
  9. Faruk Selcuk & Ramazan Gencay, 2001. "Overnight Borrowing, Interest Rates and Extreme Value Theory," Departmental Working Papers 0103, Bilkent University, Department of Economics.
  10. 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.
  11. Yougbaré, Lassana, 2011. "Exchange rate arrangements and misalignments: contrasting words and deeds," MPRA Paper 32362, University Library of Munich, Germany.
  12. Lahiri, Amartya, 2000. "Disinflation programs under policy uncertainty," Journal of International Economics, Elsevier, vol. 50(2), pages 351-373, April.

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