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Stabilization with Exchange Rate Management

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  • Drazen, Allan
  • Helpman, Elhanan

Abstract

Stabilization programs in open economies typically consist of two stages. In the first stage the rate of currency devaluation is reduced without a sufficient fiscal adjustment to eliminate the deficit that causes continued growth of debt and loss of reserves. Only later, at a second stage, is this followed by either an abandonment of exchange rate management or by a sufficiently large cut in the fiscal deficit. We study how different second-stage policy changes affect economic dynamics during the first stage, both when the timing of a change is known, and when it is uncertain. These changes include tax increases, budget cuts on traded and nontraded goods, and increases in the growth rate of money.

Suggested Citation

  • Drazen, Allan & Helpman, Elhanan, 1986. "Stabilization with Exchange Rate Management," Foerder Institute for Economic Research Working Papers 275420, Tel-Aviv University > Foerder Institute for Economic Research.
  • Handle: RePEc:ags:isfiwp:275420
    DOI: 10.22004/ag.econ.275420
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    File URL: http://ageconsearch.umn.edu/record/275420/files/TEL-AVIV-FSWP-100.pdf
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    References listed on IDEAS

    as
    1. Baxter, Marianne, 1985. "The role of expectations in stabilization policy," Journal of Monetary Economics, Elsevier, vol. 15(3), pages 343-362, May.
    2. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 311-325, August.
    3. Helpman, Elhanan & Razin, Assaf, 1987. "Exchange Rate Management: Intertemporal Tradeoffs," American Economic Review, American Economic Association, vol. 77(1), pages 107-123, March.
    4. Obstfeld, Maurice, 1984. "Balance-of-Payments Crises and Devaluation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 16(2), pages 208-217, May.
    5. Flood, Robert P. & Garber, Peter M., 1984. "Collapsing exchange-rate regimes : Some linear examples," Journal of International Economics, Elsevier, vol. 17(1-2), pages 1-13, August.
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