Exchange rate stabilization under imperfect credibility
AbstractThis paper analyzes stabilization policy under predetermined exchange rates in a cash-in-advance, staggered-prices model. Under full credibility, a reduction in the rate of devaluation results in an immediate and permanent reduction in the inflation rate, with no effect on output or consumption. In contrast, a non-credible stabilization results in an initial expansion of output, followed by a later recession. The inflation rate of home goods remains above the rate of devaluation throughout the program, thus resulting in a sustained real exchange rate appreciation.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 20486.
Date of creation: Aug 1991
Date of revision:
Monetary policy; exchange rate policy; inflation stabilization; credibility;
Find related papers by JEL classification:
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
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