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Disinflation and the supply side

  • Agenor, Pierre-Richard
  • Pizzati, Lodovico

The authors study the dynamics of output, consumption, and real wages induced by a disinflation program based on permanent and temporary reductions in the nominal devaluation rate. They use an intertemporal optimizing model of a small open economy in which domestic households face imperfect world capital markets, the labor supply is endogenous, and wages are flexible. The model predicts that, with a constant capital stock and no investment, there is an initial reduction in real wages and output expands. Consumption falls on impact but increases afterward. In addition, with a temporary shock, a current account deficit emerges and, later a recession sets in, as documented in various studies. With endogenous capital accumulation, numerical simulations show that the model can also predict a boom in investment.

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Article provided by Elsevier in its journal Journal of Macroeconomics.

Volume (Year): 27 (2005)
Issue (Month): 4 (December)
Pages: 596-620

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Handle: RePEc:eee:jmacro:v:27:y:2005:i:4:p:596-620
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  1. Serven, Luis, 1995. "Capital goods imports, the real exchange rate and the current account," Journal of International Economics, Elsevier, vol. 39(1-2), pages 79-101, August.
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  16. Agenor, P.-R., 1997. "Capital-Market Imperfections and the Macroeconomic Dynamics of Small Indebted Economies," Princeton Studies in International Economics 82, International Economics Section, Departement of Economics Princeton University,.
  17. Turnovsky, Stephen J & Sen, Partha, 1991. "Fiscal Policy, Capital Accumulation, and Debt in an Open Economy," Oxford Economic Papers, Oxford University Press, vol. 43(1), pages 1-24, January.
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