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Losing Credibility; The Stabilization Blues

Author

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  • Pablo Emilio Guidotti
  • Carlos A. Végh Gramont

Abstract

In exchange rate-based stabilization programs, credibility often follows a distinct time pattern. At first it rises as the highly visible nominal anchor provides a sense of stability and hopes run high for a permanent solution to the fiscal problems. Later, as the domestic currency appreciates in real terms and the fiscal problems are not fully resolved, the credibility of the program falls, sometimes precipitously. This paper develops a political-economy model that focuses on the evolution of credibility over time, and is consistent with the pattern just described. Inflation inertia and costly budget negotiations play a key role in the model.

Suggested Citation

  • Pablo Emilio Guidotti & Carlos A. Végh Gramont, 1992. "Losing Credibility; The Stabilization Blues," IMF Working Papers 1992/073, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:1992/073
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    Cited by:

    1. Sebastian Galiani & Daniel Heymann & Mariano Tommasi, 2002. "Missed Expectations: The Argentine Convertibility," William Davidson Institute Working Papers Series 515, William Davidson Institute at the University of Michigan.
    2. 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.
    3. Mondino, Guillermo & Sturzenegger, Federico & Tommasi, Mariano, 1996. "Recurrent High Inflation and Stabilization: A Dynamic Game," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(4), pages 981-996, November.
    4. Pastine, Ivan, 2002. "Speculation and the decision to abandon a fixed exchange rate regime," Journal of International Economics, Elsevier, vol. 57(1), pages 197-229, June.
    5. Maxime Menuet, 2020. "Is a Long War Desirable? Optimal Debt Concessions in Attrition Warfare," Annals of Economics and Statistics, GENES, issue 139, pages 105-130.
    6. Torsten Persson, 1992. "Politics and economic policy," Discussion Paper / Institute for Empirical Macroeconomics 62, Federal Reserve Bank of Minneapolis.
    7. Pastor Jr., Manuel & Wise, Carol, 1999. "Stabilization and its Discontents: Argentina's Economic Restructuring in the 1990s," World Development, Elsevier, vol. 27(3), pages 477-503, March.
    8. Chang, Roberto, 2001. "Commitment, coordination failures, and delayed reforms," Journal of Monetary Economics, Elsevier, vol. 47(1), pages 123-144, February.
    9. Maurice Obstfeld, 1994. "The Logic of Currency Crises," NBER Working Papers 4640, National Bureau of Economic Research, Inc.
    10. Amartya Lahiri & Carlos A. Vegh, 2000. "Delaying the Inevitable: Optimal Interest Rate Policy and BOP Crises," NBER Working Papers 7734, National Bureau of Economic Research, Inc.
    11. Martinelli, Cesar & Escorza, Raul, 2007. "When are stabilizations delayed? Alesina-Drazen revisited," European Economic Review, Elsevier, vol. 51(5), pages 1223-1245, July.
    12. Yougbaré, Lassana, 2011. "Exchange rate arrangements and misalignments: contrasting words and deeds," MPRA Paper 32362, University Library of Munich, Germany.
    13. Lahiri, Amartya, 2000. "Disinflation programs under policy uncertainty," Journal of International Economics, Elsevier, vol. 50(2), pages 351-373, April.
    14. Diehl, Markus, 1993. "Stabilization without crisis: The case of Vietnam," Kiel Working Papers 578, Kiel Institute for the World Economy (IfW).
    15. Cesar Martinelli, 2001. "Essays on Political Economy of Political Reform," Levine's Working Paper Archive 625018000000000135, David K. Levine.

    More about this item

    Keywords

    Real exchange rates; Exchange rates; Inflation; Fiscal consolidation; Public debt; WP; balance of payments; exchange rate; nominal interest rate;
    All these keywords.

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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