Two Crises: Inflationary Inertia and Credibility
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.
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Volume (Year): 108 (1998)
Issue (Month): 448 (May)
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