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Losing Credibility: The Stabilization Blues

  • Pablo Emilio Guidotti
  • Carlos A. Végh Gramont

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.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 92/73.

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Length: 44
Date of creation: 01 Sep 1992
Date of revision:
Handle: RePEc:imf:imfwpa:92/73
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