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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.

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File URL: ftp://econpapers.fsu.edu/RePEc/fsu/wpaper/wp2005_12_01.pdf
File Function: Revised version, 2009-01
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Paper provided by Department of Economics, Florida State University in its series Working Papers with number wp2005_12_01.

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Length: 47
Date of creation: Dec 2005
Date of revision: Jan 2009
Handle: RePEc:fsu:wpaper:wp2005_12_01
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  12. Rebelo, S. & Vegh, C.A., 1995. "Real Effects of Exchange-Rate-Based Stabilization: An Analysis of Competing Theories," RCER Working Papers 405, University of Rochester - Center for Economic Research (RCER).
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  19. Drazen, Allan & Helpman, Elhanan, 1987. "Stabilization with Exchange Rate Management," The Quarterly Journal of Economics, MIT Press, vol. 102(4), pages 835-55, November.
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