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

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  • Agenor, Pierre-Richard

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. Copyright 1998 by Blackwell Publishing Ltd

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  • Agenor, Pierre-Richard, 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:231-49
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    Cited by:

    1. Sergio Rebelo & Carlos A. Vegh, 1995. "Real Effects of Exchange-Rate-Based Stabilization: An Analysis of Competing Theories," NBER Chapters, in: NBER Macroeconomics Annual 1995, Volume 10, pages 125-188, National Bureau of Economic Research, Inc.

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