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Credibility and the Dynamics of Stabilization Policy: A Basic Framework

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Listed:
  • Mr. Guillermo Calvo
  • Mr. Carlos A. Végh Gramont

Abstract

This paper studies price stabilization policy under both predetermined and flexible exchange rates. Under predetermined exchange rates, a non-credible stabilization program results in an initial expansion of output, followed by a later recession. The initial expansion accompanies an appreciating real exchange rate. Under flexible exchange rates, the recession occurs at the beginning of the program. The real exchange rate appreciates sharply on impact but depreciates afterwards. Lack of credibility is more costly under predetermined exchange rates because the real effects are more pronounced.

Suggested Citation

  • Mr. Guillermo Calvo & Mr. Carlos A. Végh Gramont, 1990. "Credibility and the Dynamics of Stabilization Policy: A Basic Framework," IMF Working Papers 1990/110, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:1990/110
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    Citations

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    Cited by:

    1. Ernesto H. Stein & Jeffry Frieden, 2000. "The Political Economy of Exchange Rate Policy in Latin America: An Analytical Overview," Research Department Publications 3118, Inter-American Development Bank, Research Department.
    2. Guillermo A. Calvo & Carlos A. Végh, 1994. "Inflation Stabilization And Nominal Anchors," Contemporary Economic Policy, Western Economic Association International, vol. 12(2), pages 35-45, April.
    3. Schweickert, Rainer & Nunnenkamp, Peter & Hiemenz, Ulrich, 1992. "Stabilisierung durch feste Wechselkurse: Fehlschlag in Entwicklungsländern - Erfolgsrezept für Osteuropa?," Kiel Discussion Papers 181, Kiel Institute for the World Economy (IfW Kiel).
    4. Kiguel, Miguel & Liviatan, Nissan, 1990. "The business cycle associated with exchange-rate-based stabilization," Policy Research Working Paper Series 513, The World Bank.
    5. van Wijnbergen, Sweder, 1992. "Trade Reform, Policy Uncertainty, and the Current Account: A Non-Expected-Utility Approach," American Economic Review, American Economic Association, vol. 82(3), pages 626-633, June.
    6. Mourmouras, Iannis A. & Su, Dou-Ming, 1995. "Central bank independence, policy reforms and the credibility of public debt stabilizations," European Journal of Political Economy, Elsevier, vol. 11(1), pages 189-204, March.
    7. Stein, Ernesto H. & Streb, Jorge M., 1998. "Political stabilization cycles in high-inflation economies," Journal of Development Economics, Elsevier, vol. 56(1), pages 159-180, June.
    8. Juan Carlos Echeverry, 1996. "The Fall in Colombian savings during the 1990s. Theory and evidence," Borradores de Economia 3593, Banco de la Republica.
    9. Daniel Daianu, 1996. "Stabilization and exchange rate policy in Romania," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 4(1), pages 229-248, May.
    10. Carlos de Almeida Cardoso & Flávio Vilela Vieira, 2004. "Câmbio, Inflação E Juros Na Transição Do Regime Cambial Brasileiro: Uma Análise De Vetores Auto-Regressivos E Causalidade," Anais do XXXII Encontro Nacional de Economia [Proceedings of the 32nd Brazilian Economics Meeting] 080, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].
    11. Özlem Aytaç, 2017. "Exchange Rate-Based Stabilizations: A Literature Review," Journal of Economic Surveys, Wiley Blackwell, vol. 31(3), pages 815-830, July.
    12. Georgy Idrisov & Lev Freinkman, 2009. "Modeling the Currency Structure of Bank Deposits: Does the Ratchet Effect Matter?," Working Papers 0005, Gaidar Institute for Economic Policy, revised 2009.
    13. Mr. Guillermo Calvo & Mr. Carlos A. Végh Gramont, 1992. "Currency Substitution in Developing Countries: An Introduction," IMF Working Papers 1992/040, International Monetary Fund.
    14. Agenor, Pierre-Richard & Khan, Mohsin S., 1996. "Foreign currency deposits and the demand for money in developing countries," Journal of Development Economics, Elsevier, vol. 50(1), pages 101-118, June.
    15. Juan Carlos Echeverry G., 1996. "Short Run Savings Fluctuations And Export Shocks.Theory And Evidence For Latin-America," Borradores de Economia 3498, Banco de la Republica.
    16. Chetan Subramanian & Jungsoo Park, 2004. "Exchange Rate Based Stabilization with Sudden Restrictions on Capital Flows," Econometric Society 2004 Far Eastern Meetings 748, Econometric Society.
    17. Sebastian Edwards, 1992. "Exchange Rates as Nominal Anchors," NBER Working Papers 4246, National Bureau of Economic Research, Inc.
    18. Sebastian Edwards, 1991. "Stabilization and Liberalization Policies in Central and Eastern Europe: Lessons From Latin America," NBER Working Papers 3816, National Bureau of Economic Research, Inc.
    19. Arman Mansoorian & Mohammed Mohsin, 2002. "The Employment, Investment and Current Account Effects of Exchange Rate Policies in a Cash-in-Advance Economy," Working Papers 2002_04, York University, Department of Economics.
    20. Calvo, Guillermo & Vegh, Carlos, 1991. "Exchange rate stabilization under imperfect credibility," MPRA Paper 20486, University Library of Munich, Germany.
    21. Kem Reat Viseth, 2001. "Currency Substitution and Financial Sector Developments in Cambodia," International and Development Economics Working Papers idec01-4, International and Development Economics.
    22. Fridman Alla & Verbetsky Aleksey, 2001. "Currency Substitution in Russia," EERC Working Paper Series 01-05e, EERC Research Network, Russia and CIS.

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