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Inflation Stabilization And Nominal Anchors

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  • GUILLERMO A. CALVO
  • CARLOS A. VÉGH

Abstract

This paper analyzes the choice of a nominal anchor in disinflation programs in chronic inflation countries. Both theory and evidence suggest several conclusions. (i) The recessionary effects associated with disinflation appear in the early stages of money‐based programs but only in the late stages of exchange rate‐based programs. (ii) Lack of credibility is more disruptive under fixed exchange rates than under floating exchange rates. (iii) Attempting to pursue a disinflationary policy while maintaining a given level of the real exchange rate is likely to be self‐defeating. (iv) A high degree of currency substitution favors the exchange rate as the nominal anchor.

Suggested Citation

  • Guillermo A. Calvo & Carlos A. Végh, 1994. "Inflation Stabilization And Nominal Anchors," Contemporary Economic Policy, Western Economic Association International, vol. 12(2), pages 35-45, April.
    • Handle: RePEc:bla:coecpo:v:12:y:1994:i:2:p:35-45
    DOI: 10.1111/j.1465-7287.1994.tb00421.x
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    References listed on IDEAS

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    1. Guillermo A. Calvo & Leonardo Leiderman & Carmen M. Reinhart, 1993. "Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors," IMF Staff Papers, Palgrave Macmillan, vol. 40(1), pages 108-151, March.
    2. repec:ucp:bkecon:9780226184890 is not listed on IDEAS
    3. Reinhart, Carmen M. & Vegh, Carlos A., 1995. "Nominal interest rates, consumption booms, and lack of credibility: A quantitative examination," Journal of Development Economics, Elsevier, vol. 46(2), pages 357-378, April.
    4. Michael Bruno & Guido Di Tella & Rudiger Dornbusch & Stanley Fischer, 1988. "Inflation Stabilization: The Experience of Israel, Argentina, Brazil, Bolivia, and Mexico," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022796, December.
    5. Helmut Frisch & Andreas Wörgötter (ed.), 1993. "Open-Economy Macroeconomics," International Economic Association Series, Palgrave Macmillan, number 978-1-349-12884-6.
    6. Bufman, G. & Leiderman, L., 1993. "Israel's Stabilization: Some Important Policy Lessons," Papers 4-93, Tel Aviv - the Sackler Institute of Economic Studies.
    7. Mr. Guillermo Calvo & Mr. Carlos A. Végh Gramont, 1990. "Credibility and the Dynamics of Stabilization Policy: A Basic Framework," IMF Working Papers 1990/110, International Monetary Fund.
    8. Kiguel, Miguel A. & Liviatan, Nissan, 1989. "The old and the new in heterodox stabilization programs : lessons from the 1960s and the 1980s," Policy Research Working Paper Series 323, The World Bank.
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