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Exchange rate-based inflation stabilization: Theory and practical applications

Author

Listed:
  • Omer Bayar

    (University of Evansville)

  • Mohammed Mohsin

    (University of Tennessee)

Abstract

We build a dynamic general equilibrium model of a small open economy to study exchange rate-based inflation stabilization. The model accounts for credibility issues, durability in consumption, and supply-side effects in policy transmission. Our results show boom-bust cycles in consumption, output, and current account, in line with stylized facts from developing economies that underwent stabilization periods. Importantly, policy responses are consistent with data only when credibility, durability, and supply channels are present at the same time. We present applications of our model to discuss the severity of credibility problems and external monetary policy.

Suggested Citation

  • Omer Bayar & Mohammed Mohsin, 2025. "Exchange rate-based inflation stabilization: Theory and practical applications," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 49(2), pages 511-535, June.
    • Handle: RePEc:spr:jecfin:v:49:y:2025:i:2:d:10.1007_s12197-025-09717-x
    DOI: 10.1007/s12197-025-09717-x
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    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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