Reinhart, Carmen and Vegh, Carlos (1999): Do Exchange Rate-Based Stabilizations Carry the Seeds of Their Own Destruction?
Download (128kB) | Preview
Most of the major exchange rate-based stabilizations (ERRS) in chronic inflation countries in the last 30 years have ended in spectacular financial and balance of payments crises. Moreover, there is a stunning resemblance in the dynamics of the main macroeconomic variables in all these programs. In the first stages, inflation falls, the economy expands, and consumer spending (particularly of durable goods) explodes. In light of this, the figure of the Finance Minister takes God¬like proportions. Shortly thereafter, however, the “dark side” of ERRS emerges. The slow convergence of inflation fuels a large real exchange rate appreciation which, together with the fall in private saving, lead to large current account imbalances and overborrowing. At this stage, the Finance Minister faces an unenviable dilemma: deflation or devaluation. Often forced by a run on the currency, he or she is eventually left with no choice but to devalue and then, having broken the no-devaluation pledge, is forced out of office, vilified, and blamed for most of the economic ills of the country.
|Item Type:||MPRA Paper|
|Original Title:||Do Exchange Rate-Based Stabilizations Carry the Seeds of Their Own Destruction?|
|Subjects:||F - International Economics > F3 - International Finance > F30 - General
F - International Economics > F3 - International Finance > F32 - Current Account Adjustment; Short-Term Capital Movements
|Depositing User:||Carmen Reinhart|
|Date Deposited:||05. Jun 2008 03:06|
|Last Modified:||16. Feb 2013 03:25|
Calvo, Guillermo, 1986, “Temporary Stabilization: Predetermined Exchange Rates,” Journal of Political Economy, pp. 131929.
Calvo, Guillermo, and Végh, Carlos A., 1993 “Exchange Rate Based Stabilisation under Imperfect Credibility,” in Helmut Frisch and Andreas Worgotter, eds., Open Economy Macroeconomics, London: MacMillan, pp. 328.
Calvo, Guillermo, and Végh, Carlos A., 1994, “Stabilization Dynamics and Backward-Looking Contracts,” Journal of Development Economics, pp. 5984.
Dornbusch, Rudiger and Werner, Alejandro, 1994, “Mexico: Stabilization, Reform and No Growth,” Brooking Papers on Economic Activity, No. 1, pp. 253315.
Drazen, Allan, and Helpman, Elhanan, 1988, “Stabilization with Exchange Rate Management under Uncertainty,” in Elbanan Helpman, Assaf Razin, and Efraim Sadka, eds., Economic Effects of the Government Budget, Cambridge, MA: MIT Press, pp. 31027.
Kiguel, Miguel, and Liviatan, Nissan, 1992, “The Business Cycle Associated with Exchange Rate Based Stabilization,” World Bank Economic Review, pp. 279305.
Rebelo, Sergio, 1994, “What Happens when Countries Peg their Exchange Rates? (The Real Side of Monetary Reforms), mimeo, (University of Rochester). Rebelo, Sergio, and Végh, Carlos A., “Real Effects of Exchange Rate-Based Stabilization: An Analysis of Competing Theories,” in NBER Macroeconomics Annual, pp. 19~5, MIT Press, forthcoming.
Reinhart, Carmen M., and Végh, Carlos A., 1995, “Nominal Interest Rates, Consumption Booms, and Lack of Credibility: A Quantitative Examination,” Journal of Development Economics, pp. 357378.
Rodriguez, Carlos A., 1982, “The Argentine Stabilization Plan of December 20th,” World Development, pp. 801-811.
Roldos, Jorge, 1995, “On Credible Disinflation,” !MF Working Paper 93/90, 1993. Roldos, Jorge, “Supply-Side Effects of Disinflation Programs,” IMF Staff Papers, pp. 158183.
Uribe, Martin, 1995, “Exchange-Rate-Based Stabilization: The Initial Real Effects of Credible Plans,” IF Discussion Paper 1 503, Board of Governors of the Federal Reserve System.
Végh, Carlos A., 1992, “Stopping High Inflation: An Analytical Overview,” IMF Staff Papers, pp. 626695.