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Losing Credibility: The Stabilization Blues

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  • Guidotti, Pablo E
  • Vegh, Carlos A

Abstract

In exchange rate-based stabilization programs, credibility often follows a distinct time pattern. At first it rises as the highly visible nominal anchor provides a sense of stability and hopes run high for a permanent solution to fiscal problems. Later, as the domestic currency appreciates in real terms and the fiscal problems are not fully resolved, the credibility of the program falls, sometimes precipitously. This paper develops a political-economy model that focuses on the evolution of credibility over time, and is consistent with the pattern just described. Inflation inertia and costly budget negotiations play a key role. Copyright 1999 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Suggested Citation

  • Guidotti, Pablo E & Vegh, Carlos A, 1999. "Losing Credibility: The Stabilization Blues," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(1), pages 23-51, February.
  • Handle: RePEc:ier:iecrev:v:40:y:1999:i:1:p:23-51
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    Cited by:

    1. Amartya Lahiri & Carlos A. Vegh, 2000. "Delaying the Inevitable: Optimal Interest Rate Policy and BOP Crises," NBER Working Papers 7734, National Bureau of Economic Research, Inc.
    2. Martinelli, Cesar & Escorza, Raul, 2007. "When are stabilizations delayed? Alesina-Drazen revisited," European Economic Review, Elsevier, vol. 51(5), pages 1223-1245, July.
    3. Sebastian Galiani & Daniel Heymann & Mariano Tommasi, 2002. "Missed Expectations: The Argentine Convertibility," William Davidson Institute Working Papers Series 515, William Davidson Institute at the University of Michigan.
    4. Stein, Ernesto H. & Streb, Jorge M., 1998. "Political stabilization cycles in high-inflation economies," Journal of Development Economics, Elsevier, vol. 56(1), pages 159-180, June.
    5. Persson, T., 1992. "Politics and Economic Policy," Papers 518, Stockholm - International Economic Studies.
    6. Yougbaré, Lassana, 2011. "Exchange rate arrangements and misalignments: contrasting words and deeds," MPRA Paper 32362, University Library of Munich, Germany.
    7. Chang, Roberto, 2001. "Commitment, coordination failures, and delayed reforms," Journal of Monetary Economics, Elsevier, vol. 47(1), pages 123-144, February.
    8. Mondino, Guillermo & Sturzenegger, Federico & Tommasi, Mariano, 1996. "Recurrent High Inflation and Stabilization: A Dynamic Game," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(4), pages 981-996, November.
    9. Pastine, Ivan, 2002. "Speculation and the decision to abandon a fixed exchange rate regime," Journal of International Economics, Elsevier, vol. 57(1), pages 197-229, June.
    10. Maurice Obstfeld, 1994. "The Logic of Currency Crises," NBER Working Papers 4640, National Bureau of Economic Research, Inc.
    11. Lahiri, Amartya, 2000. "Disinflation programs under policy uncertainty," Journal of International Economics, Elsevier, vol. 50(2), pages 351-373, April.
    12. Pastor Jr., Manuel & Wise, Carol, 1999. "Stabilization and its Discontents: Argentina's Economic Restructuring in the 1990s," World Development, Elsevier, vol. 27(3), pages 477-503, March.
    13. Diehl, Markus, 1993. "Stabilization without crisis: The case of Vietnam," Kiel Working Papers 578, Kiel Institute for the World Economy (IfW).
    14. Cesar Martinelli, 2001. "Essays on Political Economy of Political Reform," Levine's Working Paper Archive 625018000000000135, David K. Levine.
    15. Maxime MENUET, 2016. "Is a Long War Desirable ? Optimal Debt Concessions In Attrition Warfare," LEO Working Papers / DR LEO 2367, Orleans Economics Laboratory / Laboratoire d'Economie d'Orleans (LEO), University of Orleans.

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    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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