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Exchange-Rate-Based Stabilization under Imperfect Credibility


  • Guillermo Calvo
  • Carlos A. Végh Gramont


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.

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  • Guillermo Calvo & Carlos A. Végh Gramont, 1991. "Exchange-Rate-Based Stabilization under Imperfect Credibility," IMF Working Papers 91/77, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:91/77

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    1. Edward F. Buffie & Manoj Atolia, 2011. "Exchange‐Rate‐based Stabilisation, Durables Consumption and the Stylised Facts," Economic Journal, Royal Economic Society, vol. 121(555), pages 1130-1160, September.
    2. Muhd-Zulkhibri Abdul Majid, 2004. "Sources Of Asian Currency Crisis," International Finance 0405020, EconWPA.
    3. Daniele CHECCHI & Massimo FLORIO & Jorge CARRERA, 2004. "Privatization discontent and its determinants: evidence from Latin America," Departmental Working Papers 2004-23, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.
    4. 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.
    5. Nauro F. Campos & Abrizio Coricelli, 2002. "Growth in Transition: What We Know, What We Don't, and What We Should," Journal of Economic Literature, American Economic Association, vol. 40(3), pages 793-836, September.
    6. Kolver Hernandez, 2004. "State-Dependent Nominal Rigidities & Disinflation Programs in Small Open Economies," Macroeconomics 0411021, EconWPA.
    7. Steven B. Kamin & Marc Klau, 1997. "Some multi-country evidence on the effects of real exchange rates on output," BIS Working Papers 48, Bank for International Settlements.
    8. Sergio Rebelo & Carlos A. Vegh, 1995. "Real Effects of Exchange-Rate-Based Stabilization: An Analysis of Competing Theories," NBER Chapters,in: NBER Macroeconomics Annual 1995, Volume 10, pages 125-188 National Bureau of Economic Research, Inc.
    9. Norbert Fiess & Marco fugazza & William Maloney, 2002. "Exchange Rate Appreciations, Labor Market Rigidities, and Informality," Working Papers 2005_15, Business School - Economics, University of Glasgow.
    10. Lopez, Alejandro, 1997. "Why did Colombian private savings decline in the early 1990s?," Policy Research Working Paper Series 1713, The World Bank.
    11. Lahiri, Amartya, 2001. "Exchange rate based stabilizations under real frictions: The role of endogenous labor supply," Journal of Economic Dynamics and Control, Elsevier, vol. 25(8), pages 1157-1177, August.
    12. Manoj Atolia & Edward F. Buffie, 2006. "Exchange-Rate-Based Stabilization, Durables Consumption, and Stylized Facts," Computing in Economics and Finance 2006 416, Society for Computational Economics.
    13. Gerardo Licandro & José Antonio Licandro, 2001. "Anatomía y patología de la dolarización," Documentos de trabajo 2001003, Banco Central del Uruguay, revised Dec 2001.
    14. Chetan Subramanian & Jungsoo Park, 2004. "Exchange Rate Based Stabilization with Sudden Restrictions on Capital Flows," Econometric Society 2004 Far Eastern Meetings 748, Econometric Society.
    15. Kamin, Steve B. & Rogers, John H., 2000. "Output and the real exchange rate in developing countries: an application to Mexico," Journal of Development Economics, Elsevier, vol. 61(1), pages 85-109, February.
    16. Celasun, Oya & Denizer, Cevdet & Dong He, 1999. "Capital flows, macroeconomic management, and the financial system - Turkey, 1989-97," Policy Research Working Paper Series 2141, The World Bank.
    17. Federico Sturzenegger, 2003. "¿Por Qué Crecen Menos los Regímenes de Tipo de Cambio Fijo?: El Efecto de los Sudden Stops," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 40(121), pages 646-655.
    18. Michael Kumhof & Douglas Laxton, 2005. "A Rational Expectations Model of Optimal Inflation Inertia," Computing in Economics and Finance 2005 429, Society for Computational Economics.
    19. Guillermo J. Vuletin, 2004. "Exchange Rate Regimes And Fiscal Performance. Do Fixed Exchange Rate Regimes Generate More Discipline Than Flexible Ones?," Econometric Society 2004 North American Winter Meetings 474, Econometric Society.
    20. Amartya Lahiri, 1996. "Disinflation Programs Under Policy Uncertainty: Insights for Exchange-Rate-Based Stabilization Programs," UCLA Economics Working Papers 761, UCLA Department of Economics.
    21. Fridman Alla & Verbetsky Aleksey, 2001. "Currency Substitution in Russia," EERC Working Paper Series 01-05e, EERC Research Network, Russia and CIS.
    22. Steven B. Kamin, 1996. "Real exchange rates and inflation in exchange-rate based stabilizations: an empirical examination," International Finance Discussion Papers 554, Board of Governors of the Federal Reserve System (U.S.).
    23. Amartya Lahiri, 1996. "Macroeconomic Effects of Devaluation Rate Changes: Dynamic implications under alternative regimes of capital mobility," UCLA Economics Working Papers 760, UCLA Department of Economics.


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