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The Capital Inflows Problem Revisited: A Stylized Model of Southern Cone Disinflation

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  • Maurice Obstfeld

Abstract

In the late 1970s, countries in Latin America's Southern Cone initiated attempts to lower domestic inflation rates through the progressive reduction of a preannounced rate of exchange-rate devaluation. The stabilization programs gave rise to massive capital inflows, real exchange-rate appreciation, and current-account deficits. This paper develops a stylized intertemporal framework in which the effects of a credible preannounced disinflation scheme can be studied. It is shown that even when agents have perfect foresight and markets clear continuously, the "capital inflows" phenomenon and the associated real appreciation may result. While unanticipated, permanent inflation changes are neutral in the paper, anticipated inflation is neutral only in exceptional circumstances. A preannounced disinflation operates by altering the path of an expenditure-based real domestic interest rate that depends on expected changes in the prices of liquidity services and nontradable consumption goods.

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  • Maurice Obstfeld, 1985. "The Capital Inflows Problem Revisited: A Stylized Model of Southern Cone Disinflation," Review of Economic Studies, Oxford University Press, vol. 52(4), pages 605-625.
  • Handle: RePEc:oup:restud:v:52:y:1985:i:4:p:605-625.
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    Cited by:

    1. James M. Poterba & Julio J. Rotemberg, 1986. "Money in the Utility Function: An Empirical Implementation," Working papers 408, Massachusetts Institute of Technology (MIT), Department of Economics.
    2. Reinhart, Carmen & Vegh, Carlos, 1994. "Inflation stabilization in chronic inflation countries: The empirical evidence," MPRA Paper 13689, University Library of Munich, Germany.
    3. Kiguel, Miguel & Liviatan, Nissan, 1990. "The business cycle associated with exchange-rate-based stabilization," Policy Research Working Paper Series 513, The World Bank.
    4. Bufman, G. & Leiderman, L., 1992. "Simulating an Optimizing Model of Currency Substitution," Papers 6-92, Tel Aviv - the Sackler Institute of Economic Studies.
    5. Kiminori Matsuyama, 1989. "Complicated Topological Structure of the Set of Equilibrium Prices," Discussion Papers 826, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    6. Timothy J Condon, 1986. "Flujo de Comercio y la Política del Tipo de Cambio Reptante: Un Modelo de Predicción Perfecta de Largo Plazo," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 23(68), pages 25-48.
    7. Haaparanta, Pertti & Puhakka, Mikko, 2004. "Endogenous time preference, investment and development traps," BOFIT Discussion Papers 4/2004, Bank of Finland, Institute for Economies in Transition.
    8. Calvo, Guillermo A. & Vegh, Carlos A., 1999. "Inflation stabilization and bop crises in developing countries," Handbook of Macroeconomics,in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 24, pages 1531-1614 Elsevier.
    9. Vegh, Carlos, 1991. "Stopping High Inflation: An Analytical Overview," MPRA Paper 20175, University Library of Munich, Germany.
    10. Keskinsoy, Bilal, 2017. "Taxi, Takeoff and Landing: Behavioural Patterns of Capital Flows to Emerging Markets," MPRA Paper 78129, University Library of Munich, Germany.
    11. Kiminori Matsuyama, 1989. "Serial Correlation of Sunspot Equilibria (Rational Bubbles) in Two Popular Models of Monetary Economies," Discussion Papers 827, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    12. Steven F. Venti & David A. Wise, 1987. "IRAs and Saving," NBER Chapters,in: The Effects of Taxation on Capital Accumulation, pages 7-52 National Bureau of Economic Research, Inc.
    13. Martin Uribe, 1997. "Habit formation and the comovement of prices and consumption during exchange-rate based stabilization programs," International Finance Discussion Papers 598, Board of Governors of the Federal Reserve System (U.S.).
    14. Lahiri, Amartya, 2001. "Exchange rate based stabilizations under real frictions: The role of endogenous labor supply," Journal of Economic Dynamics and Control, Elsevier, vol. 25(8), pages 1157-1177, August.
    15. Kiguel, Miguel A. & Liviatan, Nissan, 1988. "Inflationary rigidities and stabilization policies," Policy Research Working Paper Series 4, The World Bank.
    16. Obstfeld, Maurice, 1989. "Fiscal deficits and relative prices in a growing world economy," Journal of Monetary Economics, Elsevier, vol. 23(3), pages 461-484, May.
    17. Jorge Roldos, 1993. "On Credible Disinflation," IMF Working Papers 93/90, International Monetary Fund.
    18. Uribe, Martin, 1997. "Exchange-rate-based inflation stabilization: The initial real effects of credible plans," Journal of Monetary Economics, Elsevier, vol. 39(2), pages 197-221, July.
    19. Liviatan, Nissan, 1988. "Israel's stabilization program," Policy Research Working Paper Series 91, The World Bank.
    20. Agenor, Pierre-Richard & Pizzati, Lodovico, 2005. "Disinflation and the supply side," Journal of Macroeconomics, Elsevier, vol. 27(4), pages 596-620, December.
    21. Françoise Charpin, 1992. "La détention de monnaie dans la théorie du cycle de vie," Revue Économique, Programme National Persée, vol. 43(3), pages 419-444.
    22. Amartya Lahiri, 1996. "Disinflation Programs Under Policy Uncertainty: Insights for Exchange-Rate-Based Stabilization Programs," UCLA Economics Working Papers 761, UCLA Department of Economics.
    23. Shigeto Kitano, 2004. "Macroeconomic effect of capital controls as a safeguard against the capital inflow problem," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 13(3), pages 233-263.
    24. Leonardo Hernández, 1991. "Credibilidad, Problema Peso y Comportamiento de las Tasas de Interés: Chile 1979-1982," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 28(85), pages 385-410.
    25. Amartya Lahiri, 1996. "Macroeconomic Effects of Devaluation Rate Changes: Dynamic implications under alternative regimes of capital mobility," UCLA Economics Working Papers 760, UCLA Department of Economics.

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