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Why is Inflation so Low after Large Devaluations?


  • Ariel Burstein

    () (University of Michigan)

  • Martin Eichenbaum

    () (Northwestern University)

  • Sergio Rebelo

    () (Northwestern University)


This paper studies the behavior of inflationnafter nine large post-1990 contractionary devaluations. A salient feature of the data is that inflation is low relative to the rate of devaluation. We argue that distribution costs and substitution away from imports to lower quality local goods can account quantitatively for the post-devaluation behavior of prices.

Suggested Citation

  • Ariel Burstein & Martin Eichenbaum & Sergio Rebelo, 2003. "Why is Inflation so Low after Large Devaluations?," IEHAS Discussion Papers 0308, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
  • Handle: RePEc:has:discpr:0308

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    References listed on IDEAS

    1. Dornbusch, Rudiger, 1989. " Real Exchange Rates and Macroeconomics: A Selective Survey," Scandinavian Journal of Economics, Wiley Blackwell, vol. 91(2), pages 401-432.
    2. Pinelopi Koujianou Goldberg & Michael M. Knetter, 1997. "Goods Prices and Exchange Rates: What Have We Learned?," Journal of Economic Literature, American Economic Association, vol. 35(3), pages 1243-1272, September.
    3. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, July.
    4. Mario J. Crucini & Chris I. Telmer & Marios Zachariadis, 2005. "Understanding European Real Exchange Rates," American Economic Review, American Economic Association, vol. 95(3), pages 724-738, June.
    5. Edwards, Sebastian & Vegh, Carlos A., 1997. "Banks and macroeconomic disturbances under predetermined exchange rates," Journal of Monetary Economics, Elsevier, vol. 40(2), pages 239-278, October.
    6. Ilan Goldfajn & Sérgio Ribeiro da Costa Werlang, 2000. "The Pass-through from Depreciation to Inflation: A Panel Study," Working Papers Series 5, Central Bank of Brazil, Research Department.
    7. Martin Neil Baily & Robert M. Solow, 2001. "International Productivity Comparisons Built from the Firm Level," Journal of Economic Perspectives, American Economic Association, vol. 15(3), pages 151-172, Summer.
    8. Guillermo A. Calvo, 1998. "Capital Flows and Capital-Market Crises: The Simple Economics of Sudden Stops," Journal of Applied Economics, Universidad del CEMA, vol. 1, pages 35-54, November.
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    Cited by:

    1. Ariel T. Burstein & João C. Neves & Sergio Rebelo, 2004. "Investment Prices and Exchange Rates: Some Basic Facts," Journal of the European Economic Association, MIT Press, vol. 2(2-3), pages 302-309, 04/05.
    2. de Blas, Beatriz, 2008. "International Transmission of Shocks under Financial Frictions: Some Implications for International Business Cycle Comovement," Working Papers in Economic Theory 2008/01, Universidad Autónoma de Madrid (Spain), Department of Economic Analysis (Economic Theory and Economic History).
    3. Armandobaqueiro & Alejandro Diaz Deleon & Albertotorres, 2003. "¿Temor A La Flotacióno Al Inflación? La Importancia Del Traspaso Del Tipo De Cambio A Losprecios," ENSAYOS SOBRE POLÍTICA ECONÓMICA, BANCO DE LA REPÚBLICA - ESPE, vol. 21(44), pages 64-94, December.
    4. Charles Engel, 2004. "On the Relationship between Pass-Through and Sticky Nominal Prices," Working Papers 112004, Hong Kong Institute for Monetary Research.
    5. Michael B. Devereux & Charles Engel, 2005. "Expenditure Switching vs. Real Exchange Rate Stabilization: Competing Objectives for Exchange Rate Policy," Working Papers 082005, Hong Kong Institute for Monetary Research.
    6. Ramkishen S. Rajan, 2007. "Managing new-style currency crises: the swan diagram approach revisited," Journal of International Development, John Wiley & Sons, Ltd., vol. 19(5), pages 583-606.
    7. Armando Baqueiro & Alejandro Díaz de León & Alberto Torres, 2003. "¿Temor a la flotación o a la inflación? La importancia del traspaso" del tipo de cambio a los precios"," ENSAYOS SOBRE POLÍTICA ECONÓMICA, BANCO DE LA REPÚBLICA - ESPE, vol. 21(44), pages 64-94, December.

    More about this item


    inflation; devaluation; exchange rates;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange


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