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Credit and Exchange Rate-Based Stabilization

  • May Y. Khamis
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    This paper examines the behavior of private sector credit in chronic inflation countries that undergo exchange rate-based inflation stabilizations. It concludes that these programs are characterized by a strong increase in private sector credit, both in absolute terms and as a fraction of real economic activity. Empirical results using data for Mexico, Chile, Argentina, and Israel support a negative statistically significant relationship between credit and inflation for Mexico, Argentina, and Chile, but not for Israel. In addition, for both Chile and Mexico, dummy variables representing periods of inflation stabilization are positive and statistically different from zero indicating a stronger expansion in private sector credit during stabilization. These results could potentially explain the consumption boom that is usually present in the early stages of these programs.

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    Paper provided by International Monetary Fund in its series IMF Working Papers with number 96/51.

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    Length: 54
    Date of creation: 01 May 1996
    Date of revision:
    Handle: RePEc:imf:imfwpa:96/51
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    1. Marilyn E. Skiles, 1991. "Stabilization and financial sector reform in Mexico," Research Paper 9125, Federal Reserve Bank of New York.
    2. Reinhart, Carmen & Vegh, Carlos, 1994. "Intertemporal consumption substitution and inflation stabilization:An empirical investigation," MPRA Paper 13427, University Library of Munich, Germany.
    3. Olivier J. Blanchard, 1984. "Debt, Deficits and Finite Horizons," NBER Working Papers 1389, National Bureau of Economic Research, Inc.
    4. Elhanan Helpman & Assaf Razin, 1985. "Exchange Rate Management: Intertemporal Tradoffs," NBER Working Papers 1590, National Bureau of Economic Research, Inc.
    5. N. Gregory Mankiw, 1983. "Consumer Durables and the Real Interest Rate," NBER Working Papers 1148, National Bureau of Economic Research, Inc.
    6. Mathieson, Donald J., 1982. "Inflation, interest rates, and the balance of payments during a financial reform: The case of Argentina," World Development, Elsevier, vol. 10(9), pages 813-827, September.
    7. Reinhart, Carmen & Vegh, Carlos, 1995. "Nominal interest rates, consumption booms, and lack of credibility: A quantitative examination," MPRA Paper 13898, University Library of Munich, Germany.
    8. Guillermo A. Calvo & Fabrizio Coricelli, 1993. "Output Collapse in Eastern Europe: The Role of Credit," IMF Staff Papers, Palgrave Macmillan, vol. 40(1), pages 32-52, March.
    9. Cochrane, John H, 1988. "How Big Is the Random Walk in GNP?," Journal of Political Economy, University of Chicago Press, vol. 96(5), pages 893-920, October.
    10. Friedman, Benjamin M, 1988. "Monetary Policy without Quantity Variables," American Economic Review, American Economic Association, vol. 78(2), pages 440-45, May.
    11. Allan Drazen & Elhanan Helpman, 1987. "Stabilization with Exchange Rate Management under Uncertainty," NBER Working Papers 2268, National Bureau of Economic Research, Inc.
    12. Brunner, Karl & Meltzer, Allan H, 1988. "Money and Credit in the Monetary Transmission Process," American Economic Review, American Economic Association, vol. 78(2), pages 446-51, May.
    13. Benjamin M. Friedman, 1988. "Monetary Policy Without Quantity Variables," NBER Working Papers 2552, National Bureau of Economic Research, Inc.
    14. Elhanan Helpman & Assaf Razin & Efraim Sadka (ed.), 1988. "Economic Effects of the Government Budget," MIT Press Books, The MIT Press, edition 1, volume 1, number 026258090x.
    15. Rodriguez, Carlos Alfredo, 1982. "The Argentine stabilization plan of December 20th," World Development, Elsevier, vol. 10(9), pages 801-811, September.
    16. Allan Drazen & Elhanan Helpman, 1987. "Stabilization with Exchange Rate Management," The Quarterly Journal of Economics, Oxford University Press, vol. 102(4), pages 835-855.
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