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Exchange-Rate-Based Stabilization, Durables Consumption, and the Stylized Facts


  • Edward F. Buffie

    () (Department of Economics, Indiana University)

  • Manoj Atolia

    () (Department of Economics, Florida State University)


In this paper we show that a model featuring durables consumption, weak credibility, and sticky prices can explain many of the stylized facts associated with exchange-rate-based stabilization, including the quantitative variation exhibited by key macroeconomic variables. In standard models, the boom phase of ERBS is nothing more than a tepid expansion – changes in spending, real output, and the real exchange rate are unexceptional. But when durables are part of the choice set, the boom is truly a boom: following a temporary reduction in the crawl, total consumption spending rises 12-20%, the real exchange rate appreciates 40-55%, and the current account deficit swells to 5-7% of GDP. None of these results requires easy intertemporal substitution in consumption.

Suggested Citation

  • Edward F. Buffie & Manoj Atolia, 2005. "Exchange-Rate-Based Stabilization, Durables Consumption, and the Stylized Facts," Working Papers wp2005_12_01, Department of Economics, Florida State University, revised Jan 2009.
  • Handle: RePEc:fsu:wpaper:wp2005_12_01

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    References listed on IDEAS

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    Cited by:

    1. Aytac, Ozlem, 2015. "A model of a heterodox exchange rate based stabilization," Economic Modelling, Elsevier, vol. 46(C), pages 100-117.

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    Reverse Shooting; Global Nonlinear Saddlepath Solution;

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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