Exchange-Rate-Based Stabilization under Imperfect Credibility
Title | Exchange-Rate-Based Stabilization under Imperfect Credibility PDF eBook |
Author | Mr.Guillermo Calvo |
Publisher | International Monetary Fund |
Pages | 34 |
Release | 1991-08-01 |
Genre | Business & Economics |
ISBN | 1451849915 |
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 expansion of 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.
Exchange-Rate-Based Stabilization Under Imperfect Credibility
Title | Exchange-Rate-Based Stabilization Under Imperfect Credibility PDF eBook |
Author | Carlos Végh |
Publisher | |
Pages | 34 |
Release | 2006 |
Genre | |
ISBN |
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 expansion of 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.
Exchange Rate Based Stabilization Under Imperfect Credibility
Title | Exchange Rate Based Stabilization Under Imperfect Credibility PDF eBook |
Author | Guillermo Calvo |
Publisher | |
Pages | 0 |
Release | 1991 |
Genre | |
ISBN |
Exchange Rate Uncertainty in Money-Based Stabilization Programs
Title | Exchange Rate Uncertainty in Money-Based Stabilization Programs PDF eBook |
Author | Mr.R. Armando Morales |
Publisher | International Monetary Fund |
Pages | 19 |
Release | 1998-01-01 |
Genre | Business & Economics |
ISBN | 1451841876 |
Complementing the explanation provided by Calvo and Vegh (1994) for money-based stabilization programs, exchange rate uncertainty introduced to a particular version of the portfolio approach with imperfect competition in the banking system leads to a bias toward appreciation that is directly related to the divergence of expectations and that dampens the interaction between portfolio movements and the real exchange rate. Based on Frankel-Froot, uncertainty exists when the fundamental equilibrium real exchange rate is temporarily unknown in a foreign exchange market with two types of agents: ‘parity-guessers,’ who expect a jump to a reference parity level, and ‘money-followers,’ who expect nominal depreciation equal to the monetary rule.
Interest Rate Rules, Inflation Stabilization, and Imperfect Credibility
Title | Interest Rate Rules, Inflation Stabilization, and Imperfect Credibility PDF eBook |
Author | Guillermo A. Calvo |
Publisher | |
Pages | 27 |
Release | 2007 |
Genre | Interest rates |
ISBN |
"The paper examines the robustness of Interest Rate Rules, IRRs, in the context of an imperfectly credible stabilization program, closely following the format of much of the literature in open-economy models, e.g., Calvo and V̌gh (1993 and 1999). A basic result is that IRRs, like Exchange Rate Based Stabilization, ERBS, programs, could give rise to macroeconomic distortion, e.g., underutilization of capacity and real exchange rate misalignment. However, while under imperfect credibility EBRS is associated with overheating and current account deficits, IRRs give rise to somewhat opposite results. Moreover, the paper shows that popular policies to counteract misalignment, like Strategic Foreign Exchange Market Intervention or Controls on International Capital Mobility may not be effective or could even become counterproductive. The bottom line is that the greater exchange rate flexibility granted by IRRs is by far not a sure shot against the macroeconomic costs infringed by imperfect credibility."--abstract.
The Behavior of Real Interest Rates in Exchange-Rate Based Stabilization Programs
Title | The Behavior of Real Interest Rates in Exchange-Rate Based Stabilization Programs PDF eBook |
Author | Pierre-Richard Agénor |
Publisher | International Monetary Fund |
Pages | 39 |
Release | 1994-06-01 |
Genre | Business & Economics |
ISBN | 1451849664 |
This paper examines the behavior of real interest rates in exchange-rate based stabilization programs. The analysis is based on a model with imperfect capital mobility and optimizing agents. A permanent reduction in the devaluation rate is first shown to have an ambiguous effect on real interest rates on impact. The analysis is then extended to consider a stabilization program characterized by an initial reduction in the rate of devaluation of the nominal exchange rate, and the announcement of a future increase in income taxes. The impact effect on real interest rates is shown to depend upon the degree of credibility of the announcement. Real interest rates may fall if agents do not believe that taxes will be raised, and rise if the future tax reform is sufficiently credible.
Foreign Exchange Intervention under Policy Uncertainty
Title | Foreign Exchange Intervention under Policy Uncertainty PDF eBook |
Author | Gustavo Adler |
Publisher | International Monetary Fund |
Pages | 40 |
Release | 2016-03-23 |
Genre | Business & Economics |
ISBN | 1475547234 |
We study the use of foreign exchange (FX) intervention as an additional policy instrument in an environment with learning, where agents infer the central bank policy rules from its policy actions. Under full information, a central bank focused on stabilizing output and inflation can achieve better outcomes by using FX intervention as an additional policy tool. Under policy uncertainty, where agents perceive that monetary policy may also have exchange rate stabilization goals, the use of FX intervention entails a trade-off, reducing output volatility while increasing inflation volatility. While having an additional policy tool is always beneficial, we find that the optimal magnitude of intervention is higher in monetary policy regimes with lower uncertainty. These results indicate that the benefits of using FX intervention as an additional stabilization tool are greater in regimes where monetary policy is credibly focused on output and inflation stabilization.