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Nominal interest rates, consumption booms, and lack of credibility: A quantitative examination

  • Reinhart, Carmen M.
  • Vegh, Carlos A.

Exchange rate-based stabilization programs in chronic-inflation countries have often been accompanied by an initial expansion of private consumption followed by a contraction. This consumption cycle has been attributed to lack of credibility, in the sense that the public views the reduction in the devaluation rate as temporary. This paper assesses the quantitative relevance of the 'temporariness' hypothesis by comparing the predictions of a simple model to the actual figures for seven major programs. The paper concludes that nominal interest rates must fall substantially for the 'temporariness' hypothesis to account for an important fraction of the observed consumption booms.

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Article provided by Elsevier in its journal Journal of Development Economics.

Volume (Year): 46 (1995)
Issue (Month): 2 (April)
Pages: 357-378

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Handle: RePEc:eee:deveco:v:46:y:1995:i:2:p:357-378
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