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Two Crises: Inflationary Inertia and Credibility

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  • Edwards, Sebastian

Abstract

This paper provides a comparative analysis of the Mexican currency crisis of 1994 and the Chilean crisis of 1982 to assess to what extent exchange-rate-based stabilization programs are successful in reducing--or even eliminating--inflationary inertia. The paper provides a brief overview of the Chilean and Mexican reform and stabilization programs. A theoretical model that emphasizes the role of credibility is developed to analyze the effects of exchange-rate based stabilization programs on inflationary inertia. According to the model, less than credible stabilizations will not eliminate inertia and will generate major real exchange rate overvaluation. Detailed data are used to test the hypothesis.

Suggested Citation

  • Edwards, Sebastian, 1998. "Two Crises: Inflationary Inertia and Credibility," Economic Journal, Royal Economic Society, vol. 108(448), pages 680-702, May.
  • Handle: RePEc:ecj:econjl:v:108:y:1998:i:448:p:680-702
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    Cited by:

    1. Sanchez-Fung, Jose R, 2003. "Inflation targeting and monetary analysis in Chile and Mexico," Royal Economic Society Annual Conference 2003 179, Royal Economic Society.
    2. Peter A. Prazmowski & José R. Sánchez-Fung, 2014. "Assessing the impact of different nominal anchors on the credibility of stabilisation programmes," Journal of Applied Economics, Universidad del CEMA, vol. 17, pages 353-372, November.
    3. Georgios P. Kouretas & Mark E. Wohar, 2012. "The dynamics of inflation: a study of a large number of countries," Applied Economics, Taylor & Francis Journals, vol. 44(16), pages 2001-2026, June.
    4. Sebastian Edwards, 2011. "Exchange-Rate Policies in Emerging Countries: Eleven Empirical Regularities From Latin America and East Asia," Open Economies Review, Springer, vol. 22(4), pages 533-563, September.
    5. Raphael Bergoeing & Patrick J. Kehoe & Timothy J. Kehoe & Raimundo Soto, 2002. "Decades lost and found: Mexico and Chile since 1980," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 3-30.
    6. Sebastian Edwards, 2006. "The Relationship Between Exchange Rates and Inflation Targeting Revisited," NBER Working Papers 12163, National Bureau of Economic Research, Inc.
    7. Kermer Silvio & Mittendorf Marcus & Sell Friedrich L., 2000. "Zum Beharrungsvermögen von sozialen Übereinkünften - das Beispiel der Habilitation," ORDO. Jahrbuch für die Ordnung von Wirtschaft und Gesellschaft, De Gruyter, vol. 51(1), pages 261-276, January.
    8. Henry, Olan T. & Shields, Kalvinder, 2004. "Is there a unit root in inflation?," Journal of Macroeconomics, Elsevier, vol. 26(3), pages 481-500, September.
    9. Çiçek, Serkan & Akar, Cüneyt, 2013. "The asymmetry of inflation adjustment in Turkey," Economic Modelling, Elsevier, vol. 31(C), pages 104-118.
    10. Sebastián Edwards, 2007. "The Relationship between Exchange Rates and Inflation Targeting Revisited," Central Banking, Analysis, and Economic Policies Book Series,in: Frederic S. Miskin & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Se (ed.), Monetary Policy under Inflation Targeting, edition 1, volume 11, chapter 10, pages 373-413 Central Bank of Chile.
    11. Dias, Daniel A. & Marques, Carlos Robalo, 2010. "Using mean reversion as a measure of persistence," Economic Modelling, Elsevier, vol. 27(1), pages 262-273, January.
    12. Sanchez-Fung, Jose R., 2002. "Inflation targeting and monetary analysis in Chile and Mexico," Economics Discussion Papers 2002-7, School of Economics, Kingston University London.
    13. Spulbăr Cristi & Niţoi Mihai & STANCIU Cristian, 2012. "Inflation Inertia and Inflation Persistence in Romania Using a DSGE Approach," Scientific Annals of Economics and Business, Sciendo, vol. 59(1), pages 115-124, July.
    14. Augustine Arize & John Malindretos & Kiseok Nam, 2005. "Inflation and Structural Change in 50 Developing Countries," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 33(4), pages 461-471, December.
    15. Sebastian Edwards, 2011. "Exchange Rates in Emerging Countries: Eleven Empirical Regularities from Latin America and East Asia," NBER Working Papers 17074, National Bureau of Economic Research, Inc.
    16. Sebastian Edwards, 2001. "Exchange Rate Regimes, Capital Flows and Crisis Prevention," NBER Working Papers 8529, National Bureau of Economic Research, Inc.

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