Exchange rate stabilization under imperfect credibility Report as inadecuate

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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 expansionof 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.

Item Type: MPRA Paper -

Original Title: Exchange rate stabilization under imperfect credibility-

Language: English-

Keywords: Monetary policy, exchange rate policy, inflation stabilization, credibility-

Subjects: F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics-

Author: Calvo, Guillermo


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