Intertemporal substitution in a monetary framework : evidence from Chile and Mexico
This paper estimates a monetary Euler system of a utility-maximizing representative consumer from two inflationary Latin American countries: Chile in the late seventies and Mexico in the early eighties. The results show that money is necessary to get reasonable parameters of the utility function. For both countries, tests of the overidentifying restrictions are satisfactory at usual levels of significance and estimates for the intertemporal elasticity of substitution are greater than one. The results indicate that velocity sensitivity to the nominal interest rate is lower for Chile than for Mexico, but this difference could be explained by a model of currency substitution. More important, a model of currency substitution may be the appropriate way to explain the monetary puzzle observed in Mexico after the stabilization attempt of late 1987. Despite the fact that inflation was sharply (and permanently) reduced, velocity did not go down. The model of currency substitution suggests that a good way to hedge against discrete devaluation would be to increase liquidity in foreign - not domestic - currency.
|Date of creation:||31 Dec 1990|
|Date of revision:|
|Contact details of provider:|| Postal: 1818 H Street, N.W., Washington, DC 20433|
Phone: (202) 477-1234
Web page: http://www.worldbank.org/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Bernanke, Ben, 1985.
"Adjustment costs, durables, and aggregate consumption,"
Journal of Monetary Economics,
Elsevier, vol. 15(1), pages 41-68, January.
- Ben S. Bernanke, 1982. "Adjustment Costs, Durables, and Aggregate Consumption," NBER Working Papers 1038, National Bureau of Economic Research, Inc.
- Calvo, Guillermo A, 1986. "Temporary Stabilization: Predetermined Exchange Rates," Journal of Political Economy, University of Chicago Press, vol. 94(6), pages 1319-29, December.
- Calvo, Guillermo A., 1985. "Currency substitution and the real exchange rate: the utility maximization approach," Journal of International Money and Finance, Elsevier, vol. 4(2), pages 175-188, June.
When requesting a correction, please mention this item's handle: RePEc:wbk:wbrwps:549. 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: (Roula I. Yazigi)
If references are entirely missing, you can add them using this form.