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Inflation Stabilization and Nominal Anchors

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  • Guillermo Calvo
  • Carlos A. Végh Gramont

Abstract

This paper analyzes the choice of a nominal anchor in disinflation programs in chronic inflation countries. Both theory and evidence suggest several conclusions. (i) The recessionary effects associated with disinflation appear in the early stages of money-based programs but only in the late stages of exchange rate-based programs. (ii) Lack of credibility is more disruptive under fixed exchange rates than under floating exchange rates. (iii) Attempting to pursue a disinflationary policy while maintaining a given level of the real exchange rate is likely to be self-defeating. (iv) A high degree of currency substitution favors the exchange rate as the nominal anchor. Copyright 1994 Western Economic Association International.
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Suggested Citation

  • Guillermo Calvo & Carlos A. Végh Gramont, 1993. "Inflation Stabilization and Nominal Anchors," IMF Policy Discussion Papers 92/4, International Monetary Fund.
  • Handle: RePEc:imf:imfpdp:92/4
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    1. Reinhart, Carmen M. & Vegh, Carlos A., 1995. "Nominal interest rates, consumption booms, and lack of credibility: A quantitative examination," Journal of Development Economics, Elsevier, vol. 46(2), pages 357-378, April.
    2. Guillermo A. Calvo & Leonardo Leiderman & Carmen M. Reinhart, 1993. "Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors," IMF Staff Papers, Palgrave Macmillan, vol. 40(1), pages 108-151, March.
    3. Bufman, G. & Leiderman, L., 1993. "Israel's Stabilization: Some Important Policy Lessons," Papers 4-93, Tel Aviv - the Sackler Institute of Economic Studies.
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