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Exchange-Rate-Based Stabilization, Durables Consumption, and Stylized Facts

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Manoj Atolia (Florida State University)
Edward F. Buffie (Indiana University)

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Abstract

In this paper we show that a model featuring durables consumption, weak credibility, and sticky prices can explain many of the stylized facts associated with exchange-rate-based stabilization, including the quantitative variation exhibited by key macroeconomic variables. In standard models, the boom phase of ERBS is nothing more than a tepid expansion - changes in spending, real output, and the real exchange rate are unexceptional. But when durables are part of the choice set, the boom is truly a boom: following a temporary reduction in the crawl, total consumption spending rises 12-20\%, the real exchange rate appreciates 40-55\%, and the current account deficit swells to 5-7\% of GDP. None of these results requires easy intertemporal substitution in consumption.

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2006 with number 416.

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Date of creation: 04 Jul 2006
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Handle: RePEc:sce:scecfa:416

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Related research
Keywords: Inflation Exchange-Rate-Based-Stabilization Durables

Find related papers by JEL classification:
E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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