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On the Political Economy of Temporary Stabilization Programs

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  • Laura Alfaro

Abstract

This paper provides a political economy explanation for temporary exchange‐rate‐based stabilization programs by focusing on the distributional effects of real exchange‐rate appreciation. I propose an economy in which agents are endowed with either tradable or non‐tradable goods. Under a cash‐in‐advance assumption, a temporary reduction in the devaluation rate induces a consumption boom accompanied by real appreciation, which hurts the owners of tradable goods. The owners of non‐tradables have to weigh two opposing effects: an increase in the present value of non‐tradable goods wealth and a negative intertemporal substitution effect. For reasonable parameter values, owners of non‐tradables are better off.

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  • Laura Alfaro, 2002. "On the Political Economy of Temporary Stabilization Programs," Economics and Politics, Wiley Blackwell, vol. 14(2), pages 133-161, July.
    • Handle: RePEc:bla:ecopol:v:14:y:2002:i:2:p:133-161
    DOI: 10.1111/1468-0343.00103
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    Cited by:

    1. Lim, Jamus Jerome, 2006. "Special Interests, Regime Choice, and Currency Collapse," MPRA Paper 5516, University Library of Munich, Germany, revised 2007.
    2. Mr. Vladimir Klyuev, 2003. "The Distributional Consequences of Real Exchange Rate Adjustment," IMF Working Papers 2003/133, International Monetary Fund.
    3. Ahmet Faruk Aysan, 2006. "Distributional Effects of Boom-Bust Cycles in Developing Countries with FinancialFrictions," Working Papers 2006/10, Bogazici University, Department of Economics.
    4. Ghassan Dibeh, 2014. "The Political Economy of Monetary Policy in Resource-Rich Arab Economies," Working Papers 896, Economic Research Forum, revised Dec 2014.
    5. Terra, Maria Cristina T., 2007. "The political economy of exchange rate in Brazil," FGV EPGE Economics Working Papers (Ensaios Economicos da EPGE) 656, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil).

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