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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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Paper provided by International Monetary Fund in its series IMF Working Papers with number 91/77.

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Length: 34
Date of creation: 01 Aug 1991
Date of revision:
Handle: RePEc:imf:imfwpa:91/77
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