IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/2268.html
   My bibliography  Save this paper

Stabilization with Exchange Rate Management under Uncertainty

Author

Listed:
  • Allan Drazen
  • Elhanan Helpman

Abstract

Stabilization programs in open economies typically consist of two stages. In the first stage the rate of currency devaluation is reduced, but the fiscal adjustment does not eliminate the fiscal deficit which causes growth of debt and loss of reserves, making a future policy change necessary. Only later, at a second stage, is this followed by either an abandonment of exchange rate management or by a sufficiently large cut in the fiscal deficit. We study how different second-stage policy changes affect economic dynamics during the first stage. These changes include tax increases, budget cuts on traded and nontraded goods, and increases in the growth rate of money. Under certainty about the timing and nature of a switch, current account developments provide information about which policy instrument is expected to be used for stabilization. Uncertainty about the timing of a stabilization is shown to be important in explaining phenomena such as continuous reserve losses and the possibility that a policy change is accompanied by a surprise discrete devaluation rather than a run on reserves.

Suggested Citation

  • Allan Drazen & Elhanan Helpman, 1987. "Stabilization with Exchange Rate Management under Uncertainty," NBER Working Papers 2268, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:2268
    Note: ITI IFM
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w2268.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Allan Drazen & Elhanan Helpman, 1987. "Stabilization with Exchange Rate Management," The Quarterly Journal of Economics, Oxford University Press, vol. 102(4), pages 835-855.
    2. Flood, Robert P. & Garber, Peter M., 1984. "Collapsing exchange-rate regimes : Some linear examples," Journal of International Economics, Elsevier, vol. 17(1-2), pages 1-13, August.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Dornbusch, Rudiger, 1989. " Real Exchange Rates and Macroeconomics: A Selective Survey," Scandinavian Journal of Economics, Wiley Blackwell, vol. 91(2), pages 401-432.
    2. Gottlieb, Daniel, 1990. "Inflation and Policy Response - The Israeli Case: 1970-1989," MPRA Paper 4114, University Library of Munich, Germany.
    3. May Y Khamis, 1996. "Credit and Exchange Rate-Based Stabilization," IMF Working Papers 96/51, International Monetary Fund.
    4. Sergio Rebelo & Carlos A. Vegh, 1995. "Real Effects of Exchange-Rate-Based Stabilization: An Analysis of Competing Theories," NBER Chapters,in: NBER Macroeconomics Annual 1995, Volume 10, pages 125-188 National Bureau of Economic Research, Inc.
    5. Shigeto Kitano, 2005. "The Government's Foreign Debt in the Argentine Crisis," Review of Development Economics, Wiley Blackwell, vol. 9(3), pages 368-379, August.
    6. Guillermo A. Calvo & Allan Drazen, 1997. "Uncertain Duration of Reform: Dynamic Implications," NBER Working Papers 5925, National Bureau of Economic Research, Inc.
    7. Yuri V Sobolev, 2000. "Exchange-Rate-Based Stabilization; A Model of Financial Fragility," IMF Working Papers 00/122, International Monetary Fund.
    8. Venla Sipilä, 2002. "The Russian triple crisis 1998: currency, finance and budget," UCL SSEES Economics and Business working paper series 17, UCL School of Slavonic and East European Studies (SSEES).

    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:2268. 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.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with 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.