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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. Copyright 1994 Western Economic Association International.

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
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    1. 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.
    2. 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.
    3. Bufman, G. & Leiderman, L., 1993. "Israel's Stabilization: Some Important Policy Lessons," Papers 4-93, Tel Aviv - the Sackler Institute of Economic Studies.
    4. Reinhart, Carmen & Calvo, Guillermo & Leiderman, Leonardo, 1993. "“Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors," MPRA Paper 7125, University Library of Munich, Germany.
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