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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
Contact details of provider: Web page: http://www.elsevier.com/locate/devec

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  9. Arrau, Patricio & De Gregorio, Jose & Reinhart, Carmen & Wickham, Peter, 1991. "The demand for money in developing countries : assessing the role of financial innovation," Policy Research Working Paper Series 721, The World Bank.
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  21. Rossi, JoseW., 1989. "The demand for money in Brazil : What happened in the 1980s?," Journal of Development Economics, Elsevier, vol. 31(2), pages 357-367, October.
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  23. Arrau, Patricio, 1990. "Intertemporal substitution in a monetary framework : evidence from Chile and Mexico," Policy Research Working Paper Series 549, The World Bank.
  24. Reinhart, Carmen & Vegh, Carlos, 1994. "Intertemporal consumption substitution and inflation stabilization:An empirical investigation," MPRA Paper 13427, University Library of Munich, Germany.
  25. Giovannini, Alberto, 1985. "Saving and the real interest rate in LDCs," Journal of Development Economics, Elsevier, vol. 18(2-3), pages 197-217, August.
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