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

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

Abstract

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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Suggested Citation

  • Reinhart, Carmen M. & Vegh, Carlos A., 1995. "Nominal interest rates, consumption booms, and lack of credibility: A quantitative examination," Journal of Development Economics, Elsevier, vol. 46(2), pages 357-378, April.
  • Handle: RePEc:eee:deveco:v:46:y:1995:i:2:p:357-378
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    More about this item

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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