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Exchange rate stabilization under imperfect credibility

Author

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  • Calvo, Guillermo
  • Vegh, Carlos

Abstract

This paper analyzes stabilization policy under predetermined exchange rates in a cash-in-advance, staggered-prices model. Under full credibility, a reduction in the rate of devaluation results in an immediate and permanent reduction in the inflation rate, with no effect on output or consumption. In contrast, a non-credible stabilization results in an initial expansion of output, followed by a later recession. The inflation rate of home goods remains above the rate of devaluation throughout the program, thus resulting in a sustained real exchange rate appreciation.

Suggested Citation

  • Calvo, Guillermo & Vegh, Carlos, 1991. "Exchange rate stabilization under imperfect credibility," MPRA Paper 20486, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:20486
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    File URL: https://mpra.ub.uni-muenchen.de/20486/1/MPRA_paper_20486.pdf
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    References listed on IDEAS

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    1. Taylor, John B, 1979. "Staggered Wage Setting in a Macro Model," American Economic Review, American Economic Association, vol. 69(2), pages 108-113, May.
    2. Mr. Carlos A. Végh Gramont, 1991. "Stopping High Inflation: An Analytical Overview," IMF Working Papers 1991/107, International Monetary Fund.
    3. Romer, David, 1990. "Staggered price setting with endogenous frequency of adjustment," Economics Letters, Elsevier, vol. 32(3), pages 205-210, March.
    4. Guillermo A. Calvo & Carlos A. Végh, 1990. "Interest Rate Policy in a Small Open Economy: The Predetermined Exchange Rates Case," IMF Staff Papers, Palgrave Macmillan, vol. 37(4), pages 753-776, December.
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    6. Persson, Torsten & van Wijnbergen, Sweder, 1993. "Signalling, Wage Controls and Monetary Disinflation Policy," Economic Journal, Royal Economic Society, vol. 103(416), pages 79-97, January.
    7. Rodriguez, Carlos Alfredo, 1982. "The Argentine stabilization plan of December 20th," World Development, Elsevier, vol. 10(9), pages 801-811, September.
    8. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
    9. Coricelli, Fabrizio & Rocha, Roberto de Rezende, 1991. "Stabilization programs in Eastern Europe : a comparative analysis of the Polish and Yugoslav programs of 1990," Policy Research Working Paper Series 732, The World Bank.
    10. Feenstra, Robert C, 1985. "Anticipated Devaluations, Currency Flight, and Direct Trade Controls in a Monetary Economy," American Economic Review, American Economic Association, vol. 75(3), pages 386-401, June.
    11. Edmund Phelps, 1978. "Disinflation without recession: Adaptive guideposts and monetary policy," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 114(4), pages 783-809, December.
    12. Mr. Guillermo Calvo & Mr. Carlos A. Végh Gramont, 1990. "Credibility and the Dynamics of Stabilization Policy: A Basic Framework," IMF Working Papers 1990/110, International Monetary Fund.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Enrique Alberola & Luis Molina, 2003. "What Does Really Discipline Fiscal Policy in Emerging Markets?: the Role and Dynamics of Exchange Rate Regimes," Money Affairs, Centro de Estudios Monetarios Latinoamericanos, vol. 0(2), pages 165-192, July-Dece.
    2. Calvo, Guillermo A. & Vegh, Carlos A., 1994. "Stabilization dynamics and backward-looking contracts," Journal of Development Economics, Elsevier, vol. 43(1), pages 59-84, February.
    3. Eugenio Diaz Bonilla & Hector E. Schamis, 1999. "La economía política de las políticas de cambio en Argentina," Research Department Publications 3079, Inter-American Development Bank, Research Department.
    4. Gerardo Licandro & José Antonio Licandro, 2001. "Anatomía y patología de la dolarización," Documentos de trabajo 2001003, Banco Central del Uruguay, revised Dec 2001.
    5. Reinhart, Carmen & Calvo, Guillermo & Leiderman, Leonardo, 1992. "Capital Inflows and Real Exchange Rate Appreciation in Latin America," MPRA Paper 13843, University Library of Munich, Germany.
    6. Mr. Guillermo Calvo & Mr. Carlos A. Végh Gramont, 1992. "Currency Substitution in Developing Countries: An Introduction," IMF Working Papers 1992/040, International Monetary Fund.
    7. Álvaro Rojas O. & Felipe Jaque S., 2003. "Determinants of the Chilean Sovereign Spread: is it Purely Fundamentals?," Money Affairs, Centro de Estudios Monetarios Latinoamericanos, CEMLA, vol. 0(2), pages 137-163, July-Dece.
    8. Tamara Burdisso & Verónica Cohen Sabban & Laura D'Amato, 2003. "The Argentine Banking and Exchange Crisis of 2001: Can we Learn Something New About Financial Crisis?," Money Affairs, Centro de Estudios Monetarios Latinoamericanos, CEMLA, vol. 0(2), pages 89-136, July-Dece.
    9. Guillermo A. Calvo & Leonardo Leiderman & Carmen M. Reinhart, 1993. "Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors," IMF Staff Papers, Palgrave Macmillan, vol. 40(1), pages 108-151, March.
    10. Mr. Ken Miyajima, 2005. "Real Exchange Rates in Growing Economies: How Strong Is the Role of the Nontradables Sector?," IMF Working Papers 2005/233, International Monetary Fund.
    11. Eugenio Diaz Bonilla & Hector E. Schamis, 1999. "The Political Economy of Exchange Rate Policies in Argentina," Research Department Publications 3078, Inter-American Development Bank, Research Department.
    12. Carlos Humberto Cardona & Adriana Pontón & Eduardo Sarmiento, 1998. "Evidencia sobre las Desinflaciones: Experiencia Internacional," Borradores de Economia 102, Banco de la Republica de Colombia.
    13. Fernandez-Arias, Eduardo & Montiel, Peter J., 1995. "The surge in capital inflows to developing countries : prospects and policy response," Policy Research Working Paper Series 1473, The World Bank.
    14. Gerardo Licandro & José Antonio Licandro, 2003. "Building the Dedollarization Agenda: Lessons from the Uruguayan Case," Money Affairs, Centro de Estudios Monetarios Latinoamericanos, CEMLA, vol. 0(2), pages 193-218, July-Dece.
    15. Fridman Alla & Verbetsky Aleksey, 2001. "Currency Substitution in Russia," EERC Working Paper Series 01-05e, EERC Research Network, Russia and CIS.
    16. Bossone, Biagio, 2019. "The portfolio theory of inflation and policy (in)effectiveness," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 13, pages 1-25.

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    More about this item

    Keywords

    Monetary policy; exchange rate policy; inflation stabilization; credibility;
    All these keywords.

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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