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On Credible Disinflation

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  • Jorge Roldos
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    Abstract

    We study the effects of a credible, gradual exchange rate based disinflation program in a two sector economy. After an initial real exchange rate depreciation, the reductions in the rate of devaluation reduce the monetary wedge generated by a cash in advance constraint, leading to a gradual increase in absorption that yields progressive real exchange rate appreciations and current account deficits. An initial boom in economic activity is not followed by a later contraction, as labor supply expands during the whole length of the program.

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    File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=1066
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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 93/90.

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    Length: 26
    Date of creation: 01 Nov 1993
    Date of revision:
    Handle: RePEc:imf:imfwpa:93/90

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    Cited by:
    1. Reinhart, Carmen & Vegh, Carlos, 1994. "Intertemporal consumption substitution and inflation stabilization:An empirical investigation," MPRA Paper 13427, University Library of Munich, Germany.
    2. Reinhart, Carmen & Vegh, Carlos, 1994. "Inflation stabilization in chronic inflation countries: The empirical evidence," MPRA Paper 13689, University Library of Munich, Germany.
    3. Rebelo, Sérgio, 1995. "Real Effects of Exchange-Rate-Based Stabilization: An Analysis of Competing Theories," CEPR Discussion Papers 1220, C.E.P.R. Discussion Papers.
    4. Reinhart, Carmen & Vegh, Carlos, 1995. "Nominal interest rates, consumption booms, and lack of credibility: A quantitative examination," MPRA Paper 13898, University Library of Munich, Germany.
    5. David M. Gould, 1999. "Does the choice of nominal anchor matter?," Center for Latin America Working Papers 0499, Federal Reserve Bank of Dallas.
    6. Martin Uribe, 1997. "Habit formation and the comovement of prices and consumption during exchange-rate based stabilization programs," International Finance Discussion Papers 598, Board of Governors of the Federal Reserve System (U.S.).

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