Credibility and the Dynamics of Stabilization Policy: A Basic Framework

Abstract

This is a working paper and the aulhor would welcome any comments on the present textCitations should refer in an unpublished manuscript, mentioning the aulhor and the dale of issuance by the International Monelary Fund The views expressed are those of the aulhor and do not necessarily represent those of the Fund WP/90/110 INTERNATIONAL MONETARY FUND

Financing government expenditures in an open economy

“…3 The representative agent holds both domestic and foreign currencies. As in Calvo and Ve´gh (1994), currency substitution enters the model through a constraint on liquidity. The liquidity constraint requires that the agent makes certain purchases with a combination of domestic and foreign currencies.…”

Sticky inflation and the real effects of exchange rate-based stabilization

“…Note that in (B.7), all variables in the inflation equation are in deviations from the steady state. As in Calvo and Végh (1994), the steady state levels of the variables are those associated with e H during t =1, . .…”

Exchange Rate‐based Stabilizations: A Literature Review

“…Slow decline in inflation Slow decline in inflation Initial increase in consumption and economic activity followed by a later contraction Initial contraction in economic activity Deterioration of the current account balance No definite impact on the current account balance Real appreciation of the domestic currency Real appreciation of the domestic currency Impact response of real interest rates depends on whether the program is orthodox or heterodox Initial increase in real interest rates Source: Calvo and Vegh (1990). and large losses of international reserves.…”