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Exchange-Rate-Based Stabilization, Durables Consumption, and Stylized Facts

Listed author(s):
  • Manoj Atolia

    (Florida State University)

  • Edward F. Buffie

    (Indiana University)

In this paper we show that a model featuring durables consumption, weak credibility, and sticky prices can explain many of the stylized facts associated with exchange-rate-based stabilization, including the quantitative variation exhibited by key macroeconomic variables. In standard models, the boom phase of ERBS is nothing more than a tepid expansion - changes in spending, real output, and the real exchange rate are unexceptional. But when durables are part of the choice set, the boom is truly a boom: following a temporary reduction in the crawl, total consumption spending rises 12-20\%, the real exchange rate appreciates 40-55\%, and the current account deficit swells to 5-7\% of GDP. None of these results requires easy intertemporal substitution in consumption.

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File URL: http://mailer.fsu.edu/~matolia/ERBS1-23dec05-JMER.pdf
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File URL: http://repec.org/sce2006/up.12330.1141152117.pdf
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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2006 with number 416.

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Date of creation: 04 Jul 2006
Handle: RePEc:sce:scecfa:416
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