Intertemporal consumption substitution and inflation stabilization:An empirical investigation

Reinhart, Carmen and Vegh, Carlos (1994): Intertemporal consumption substitution and inflation stabilization:An empirical investigation.

Abstract

Exchange rate based inflation stabilization programs in developing countries often lead to an initial consumption boom followed by an eventual recession. To explain such phenomenon, theoretical models have focused on the role of intertemporal consumption substitution in response to temporary reductions in nominal interest rates. This paper assesses the empirical relevance of such mechanism for six high-inflation developing countries that have gone through repeated stabilization attempts. A simple monetary model is used to obtain estimates of the intertemporal elasticity of substitution, and dynamics simulations are carried out to test the predictive power of the model. The analysis concludes that, in several cases, temporary shocks appeared to have played a key role in generating a consumption boom.

• Item Type: MPRA Paper
• Language: English
• Keywords: inflation consumption boom stabilization interest rates
• Subjects: F - International Economics > F3 - International Finance > F32 - Current Account Adjustment ; Short-Term Capital Movements; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E21 - Consumption ; Saving ; Wealth

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