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Exchange-Rate-Based Stabilization under Imperfect Credibility

Author

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

Abstract

This paper analyzes stabilization policy under predetermined exchange rates in a cash-in-advance, staggered-prices model. Under full credibility, a reduction in the rate of devaluation results in an immediate and permanent reduction in the inflation rate, with no effect on output or consumption. In contrast, a non-credible stabilization results in an initial expansion of output, followed by a later recession. The inflation rate of home goods remains above the rate of devaluation throughout the program, thus resulting in a sustained real exchange rate appreciation.

Suggested Citation

  • Mr. Guillermo Calvo & Mr. Carlos A. Végh Gramont, 1991. "Exchange-Rate-Based Stabilization under Imperfect Credibility," IMF Working Papers 1991/077, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:1991/077
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