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Inflation, Exchange Rates and Stabilization

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  • Rudiger Dornbusch

Abstract

The essay is an extended version of the Frank D. Graham Lecture presented at Princeton University in May 1985. It discusses the interaction of inflation and exchange rate policy in a variety of contexts. Four different settings are used to highlight that role: the experiments with exchange rate overvaluation in the Southern Cone; the place of exchange depreciation in the transition from high to even higher inflation discussed in the context of Brazil; exchange rate fixing and real appreciation during stabilization in the 1920s; and finally the U.S. real appreciation of 1980-85. The common thread of the argument is that exchange rate policy can make an important contribution to stabilization, but that it can also be lead to persistent deviations from PPP, with devastatingly adverse effects.The essay investigates through what channels these PPP deviatiins arise and how they influence inflation, trade and capital flight.

Suggested Citation

  • Rudiger Dornbusch, 1985. "Inflation, Exchange Rates and Stabilization," NBER Working Papers 1739, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:1739
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    1. Rudiger Dornbusch, 1985. "Stopping Hyperinflation: Lessons from the German Inflation Experience of the 1920s," NBER Working Papers 1675, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Ayres, Joao & Hevia, Constantino & Nicolini, Juan Pablo, 2020. "Real exchange rates and primary commodity prices," Journal of International Economics, Elsevier, vol. 122(C).
    2. Luca Guerrieri & Christopher Gust & J. David López-Salido, 2010. "International Competition and Inflation: A New Keynesian Perspective," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(4), pages 247-280, October.
    3. Fackler, James S. & Rogers, John H., 1995. "Output, inflation and stabilization: a counterfactual analysis," Journal of International Money and Finance, Elsevier, vol. 14(5), pages 619-640, October.
    4. Michael Bruno, 1990. "High Inflation and the Nominal Anchors of an Open Economy," NBER Working Papers 3518, National Bureau of Economic Research, Inc.
    5. Liviatan, Nissan, 1988. "Israel's stabilization program," Policy Research Working Paper Series 91, The World Bank.
    6. Maloney, William F., 1997. "Testing capital account liberalization without forward rates Another look at Chile 1979-1982," Journal of Development Economics, Elsevier, vol. 52(1), pages 139-168, February.
    7. Rogers, John H. & Wang, Ping, 1995. "Output, inflation, and stabilization in a small open economy: Evidence from Mexico," Journal of Development Economics, Elsevier, vol. 46(2), pages 271-293, April.
    8. Seghezza, Elena & Morelli, Pierluigi, 2014. "Conflict inflation and delayed stabilization," Journal of Macroeconomics, Elsevier, vol. 39(PA), pages 171-184.
    9. Kiguel, Miguel A. & Liviatan, Nissan, 1988. "Inflationary rigidities and stabilization policies," Policy Research Working Paper Series 4, The World Bank.

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