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Are Exchange Rate-Based Stabilizations Expansionary: Theoretical Considerations and the Brazilian Case

Listed author(s):
  • Gert Wehinger


    (Department of Economics, Vienna University of Economics & B.A. and Oesterreichische Nationalbank, Economic Studies Division, POB 61, A-1010 Vienna, Austria)

High inflation economies, especially the Latin American cases like Argentina and Brazil, have ultimately been successful in stabilising their prices using the exchange rate as a nominal anchor. Contrary to conventional wisdom inflation in these cases has not been reduced at the cost of temporary recessions, instead, they have shown positive output effects. Various theoretical explanations of such boom-cycles are discussed and a model generating such an outcome is developed. Some empirical evidence is given by the Brazilian "Real Plan" of 1994. Nevertheless, the medium and long-term effects of such programmes can result in recessions and a resumption of high inflation, although the cases show that such "postponed stabilisation costs" can be overcome by adequate and flexible supply-side policies accompanying the stabilisation programme.

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Paper provided by Vienna University of Economics and Business, Department of Economics in its series Department of Economics Working Papers with number wuwp051.

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Date of creation: Aug 1997
Handle: RePEc:wiw:wiwwuw:wuwp051
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