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Intertemporal consumption substitution and inflation stabilization:An empirical investigation

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Author Info
Reinhart, Carmen
Vegh, Carlos

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Abstract

Exchange rate based inflation stabilization programs in developing countries often lead to an initial consumption boom followed by an eventual recession. To explain such phenomenon, theoretical models have focused on the role of intertemporal consumption substitution in response to temporary reductions in nominal interest rates. This paper assesses the empirical relevance of such mechanism for six high-inflation developing countries that have gone through repeated stabilization attempts. A simple monetary model is used to obtain estimates of the intertemporal elasticity of substitution, and dynamics simulations are carried out to test the predictive power of the model. The analysis concludes that, in several cases, temporary shocks appeared to have played a key role in generating a consumption boom.

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Publisher Info
Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 13427.

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Date of creation: 1994
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Handle: RePEc:pra:mprapa:13427

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Related research
Keywords: inflation consumption boom stabilization interest rates;

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Find related papers by JEL classification:
F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July. [Downloadable!] (restricted)
  2. Jorge Roldos, 1993. "On Credible Disinflation," IMF Working Papers 93/90, International Monetary Fund.
  3. N. Gregory Mankiw, 1985. "Consumer Durables and the Real Interest Rate," NBER Working Papers 1148, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Francesco Giavazzi & Marco Pagano, 1990. "Can Severe Fiscal Contractions be Expansionary? Tales of Two Small European Countries," NBER Working Papers 3372, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  5. Dornbusch, Rudiger, 1982. "Stabilization policies in developing countries: What have we learned?," World Development, Elsevier, vol. 10(9), pages 701-708, September. [Downloadable!] (restricted)
  6. Robert E. Hall, 1988. "Intertemporal Substitution in Consumption," NBER Working Papers 0720, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Reinhart, Vincent, 1990. "Targeting Nominal Income in a Dynamic Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 22(4), pages 427-43, November. [Downloadable!] (restricted)
  8. Peter Wickham & Carmen Reinhart & Jose De Gregorio & Patricio Arrau, 1991. "The Demand for Money in Developing Countries: Assessing the Role of Financial Innovation," IMF Working Papers 91/45, International Monetary Fund.
    Other versions:
  9. Hayashi, Fumio & Sims, Christopher A, 1983. "Nearly Efficient Estimation of Time Series Models with Predetermined, but Not Exogenous, Instruments," Econometrica, Econometric Society, vol. 51(3), pages 783-98, May. [Downloadable!] (restricted)
  10. Calvo, Guillermo A. & Vegh, Carlos A., 1994. "Stabilization dynamics and backward-looking contracts," Journal of Development Economics, Elsevier, vol. 43(1), pages 59-84, February. [Downloadable!] (restricted)
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  11. Giovannini, Alberto, 1985. "Saving and the real interest rate in LDCs," Journal of Development Economics, Elsevier, vol. 18(2-3), pages 197-217, August. [Downloadable!] (restricted)
  12. Calvo, Guillermo A, 1986. "Temporary Stabilization: Predetermined Exchange Rates," Journal of Political Economy, University of Chicago Press, vol. 94(6), pages 1319-29, December. [Downloadable!] (restricted)
  13. Reinhart, Carmen & Calvo, Guillermo & Vegh, Carlos, 1994. "Targeting the real exchange rate: Theory and evidence," MPRA Paper 13412, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  14. Kimbrough, Kent P., 1986. "The optimum quantity of money rule in the theory of public finance," Journal of Monetary Economics, Elsevier, vol. 18(3), pages 277-284, November. [Downloadable!] (restricted)
  15. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254. [Downloadable!] (restricted)
  16. Maurice Obstfeld, 1985. "The Capital Inflows Problem Revisited: A Stylized Model of Southern Cone Disinflation," NBER Working Papers 1456, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  17. Yvon Fauvel & Lucie Samson, 1991. "Intertemporal Substitution and Durable Goods: An Empirical Analysis," Canadian Journal of Economics, Canadian Economics Association, vol. 24(1), pages 192-205, February. [Downloadable!] (restricted)
  18. Fauvel, Y. & Samson, L., 1989. "Intertemporal Substitution And Durable Goods: An Empircal Analysis," Cahiers de recherche 8916, Université Laval - Département d'économique.
  19. Arrau, Patricio, 1990. "Intertemporal substitution in a monetary framework : evidence from Chile and Mexico," Policy Research Working Paper Series 549, The World Bank. [Downloadable!]
  20. Kiguel, Miguel A & Liviatan, Nissan, 1992. "The Business Cycle Associated.with Exchange Rate-Based Stabilizations," World Bank Economic Review, Oxford University Press, vol. 6(2), pages 279-305, May.
  21. Dowd, Kevin, 1990. "The Value of Time and the Transactions Demand for Money," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 22(1), pages 51-64, February. [Downloadable!] (restricted)
  22. Helpman, Elhanan & Razin, Assaf, 1987. "Exchange Rate Management: Intertemporal Tradeoffs," American Economic Review, American Economic Association, vol. 77(1), pages 107-23, March.
    Other versions:
  23. Cochrane, John H, 1988. "How Big Is the Random Walk in GNP?," Journal of Political Economy, University of Chicago Press, vol. 96(5), pages 893-920, October. [Downloadable!] (restricted)
  24. Robert J. Gordon, 1982. "Why Stopping Inflation May Be Costly: Evidence from Fourteen Historical Episodes," NBER Chapters, in: Inflation: Causes and Effects, pages 11-40 National Bureau of Economic Research, Inc. [Downloadable!]
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Reinhart, Carmen & Calvo, Guillermo & Leiderman, Leonardo, 1996. "Inflows of capital to developing countries in the 1990s," MPRA Paper 13707, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  2. Ernesto H. Stein & Jorge M. Streb, 1999. "Elections and the Timing of Devaluations," RES Working Papers 4164, Inter-American Development Bank, Research Department. [Downloadable!]
    Other versions:
  3. Leonardo Leiderman & Guillermo A. Calvo & Carmen Reinhart, 1994. "Inflows of Capital to Developing Countries in the 1990s: Causes and Effects," RES Working Papers 4002, Inter-American Development Bank, Research Department. [Downloadable!]
  4. Carmen M. Reinhart & R. Todd Smith, 2001. "Temporary Controls on Capital Inflows," NBER Working Papers 8422, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  5. Ernesto H. Stein & Jorge M. Streb, 1999. "Las elecciones y el momento de las devaluaciones," RES Working Papers 4165, Inter-American Development Bank, Research Department. [Downloadable!]
  6. Federico S. Mandelman, 2006. "Business cycles and monetary regimes in emerging economies: a role for a monopolistic banking sector," Working Paper 2006-17, Federal Reserve Bank of Atlanta. [Downloadable!]
  7. Leonardo Leiderman & Guillermo A. Calvo & Carmen Reinhart, 1994. "Entradas de capitales a países en desarrollo en los años 90: causas y efectos," RES Working Papers 4003, Inter-American Development Bank, Research Department. [Downloadable!]
  8. Firdu Gmech, 2006. "The Mckinnon-Shaw Hypothesis: Thirty Years on:A Review of Recent Developments in Financial Liberalization Theory," Working Papers id:537, esocialsciences.com. [Downloadable!]
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