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Losing Credibility

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Author Info

  • 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 the 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 in the model.

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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: 44
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; exchange rate; balance of payments; balance of payments crisis; nominal interest rate; real exchange rate; nominal exchange rate; exchange rate policy; exchange reserves; foreign exchange reserves; foreign exchange; fixed exchange rate; hard currency; exchange rate level; exchange rate devaluation; inflation stabilization; price stability; open economy; exchange rate regime; exchange ? rate regimes; balance of payments crises; equilibrium exchange rate; multilateral organizations; balance of payments ? crisis; market equilibrium; exchange rate increases; floating exchange rate regime; exchange rate increase; domestic price; liberalization policies; exchange rate misalignment; exchange ? rate; floating exchange rate; negotiation process; exchange rate peg;

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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. Maurice Obstfeld, 1994. "The Logic of Currency Crises," NBER Working Papers 4640, National Bureau of Economic Research, Inc.
  3. Persson, T., 1992. "Politics and Economic Policy," Papers 518, Stockholm - International Economic Studies.
  4. Sebastian Galiani & Mariano Tommasi & Daniel Heymann, 2002. "Missed Expectations: The Argentine Convertibility," Working Papers 55, Universidad de San Andres, Departamento de Economia, revised Nov 2003.
  5. Roberto Chang, 1994. "Commitment, coordination failures, and delayed reforms," Working Paper 94-10, Federal Reserve Bank of Atlanta.

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