Exchange‐Rate‐Based Stabilisation, Durables Consumption and the Stylised Facts

Abstract:     
In this article we show that a model featuring durable consumer goods, imperfect substitution between domestic and foreign assets, and weak credibility can explain the qualitative and quantitative aspects of the stylised facts associated with exchange‐rate‐based stabilisation, including the tremendous increase in real interest rates. Following a temporary reduction in the crawl, total consumption spending rises 14–26%, the real exchange rate appreciates 20–37% and the current account deficit swells to 10–15% of gross domestic product. Despite large capital inflows, the real interest rate increases from 10 to 20–100%.

Number of Pages in PDF File: 31

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