IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/0555.html
   My bibliography  Save this paper

Inflation Stabilization and Capital Mobility

Author

Listed:
  • Rudiger Dornbusch

Abstract

The paper investigates the process of inflation stabilization under conditions of international capital mobility. A first part looks at the traditional view of inflation and payments problems as a reflection of fiscal problems and deficit finance. From there the analysis proceeds to the macro-dynamics of inflation stabilization under alternative policy regimes. Inflation stabilization is studied in an open economy model of inflation and output determination with high but imperfect capital mobility. The policy regimes considered range from a monetary growth rule combined with constant real exchange rates to a prefixed path for the nominal exchange rate combined with active money for external balance. The analysis identifies three main problems in the stabilization effort. First and foremost, the problems of stubborn inflation. Because inflation does not collapse in the face of good intentions inflation stabilization requires a protracted reduction in the level of demand. The inflation process is modeled along two different lines, each emphasizing inertia. Second, the velocity problem which arises from the fact that a reduction in inflation and nominal interest rates raises real demand. This implies that in the adjustment process Inflation has to average less than money growth and, indeed, has to fall transitorily below the new rate of money creation. Third, the real exchange rate problem. This arises from the fact inflation stabilization reduces output and raises real interest rates, thus improving the balance of payments, creating a sterilization problem and/or putting upward pressure on the exchange rate. An initial real appreciation might be welcome as it provides help in the disinflation process, but it must be recognized that the benefit is transitory and must ultimately be repaid when the real exchange rate, with adverse inflation effects, returns to its equilibrium level.

Suggested Citation

  • Rudiger Dornbusch, 1980. "Inflation Stabilization and Capital Mobility," NBER Working Papers 0555, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:0555
    Note: ITI IFM
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w0555.pdf
    Download Restriction: no

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:0555. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: () or (Joanne Lustig). General contact details of provider: http://edirc.repec.org/data/nberrus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.