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The Behavior of Real Interest Rates in Exchange‐Rate‐Based Stabilization Programs

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  • Pierre‐Richard Agénor

Abstract

This paper examines the behavior of real interest rates at the inception of exchange‐rate‐based stabilization programs. The analysis is based on an optimizing model of a small open economy facing imperfect world capital markets. A reduction in the devaluation rate is shown to have a positive impact on real interest rates. By contrast, a program characterized by an initial reduction in the devaluation rate and a perceived future increase in government spending has an ambiguous effect—which depends in particular on the degree of credibility of the fiscal policy stance.

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  • Pierre‐Richard Agénor, 1998. "The Behavior of Real Interest Rates in Exchange‐Rate‐Based Stabilization Programs," Review of Development Economics, Wiley Blackwell, vol. 2(3), pages 231-249, October.
    • Handle: RePEc:bla:rdevec:v:2:y:1998:i:3:p:231-249
    DOI: 10.1111/j.1539-6924.2005.00605.x-i1
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