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Exchange‐Rate‐based Stabilisation, Durables Consumption and the Stylised Facts

  • Edward F. Buffie
  • Manoj Atolia

In this paper we show that a model featuring durables consumption, weak credibility, and sticky prices can explain many of the stylized facts associated with exchange-rate-based stabilization, including the quantitative variation exhibited by key macroeconomic variables. In standard models, the boom phase of ERBS is nothing more than a tepid expansion – changes in spending, real output, and the real exchange rate are unexceptional. But when durables are part of the choice set, the boom is truly a boom: following a temporary reduction in the crawl, total consumption spending rises 12-20%, the real exchange rate appreciates 40-55%, and the current account deficit swells to 5-7% of GDP. None of these results requires easy intertemporal substitution in consumption.

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File URL: http://hdl.handle.net/10.1111/j.1468-0297.2011.02431.x
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Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 121 (2011)
Issue (Month): 555 (09)
Pages: 1130-1160

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Handle: RePEc:ecj:econjl:v:121:y:2011:i:555:p:1130-1160
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