Money-based stabilization in a small open economy
We studied the effects of a credible money-based stabilization program under a flexible exchange rate regime in the context of New-Keynesian dynamic general equilibrium model for a small open economy. In this study, we successfully replicated the main stylized facts of money-based stabilization, a slow inflation convergence and an initial recession in domestic sector. In contrast with the previous results, however, a credible money-based disinflation in this model produces a sustained expansion in domestic sector after the initial contraction.
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