Exchange-Rate-Based Stabilization, Durables Consumption, and the Stylized Facts

42 Pages Posted: 16 Oct 2008 Last revised: 5 May 2010

See all articles by Edward F. Buffie

Edward F. Buffie

Indiana University Bloomington - Department of Economics

Manoj Atolia

Florida State University - Department of Economics

Date Written: march 1, 2010

Abstract

In this paper 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 stylized facts associated with exchange-rate-based stabilization, 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 GDP. Despite large capital inflows, the real interest rate increases from 10% to 20-100%.

Keywords: inflation, exchange-rate-based stabilization, durables

JEL Classification: E31, E63, F41

Suggested Citation

Buffie, Edward F. and Atolia, Manoj, Exchange-Rate-Based Stabilization, Durables Consumption, and the Stylized Facts (march 1, 2010). Available at SSRN: https://ssrn.com/abstract=1285127 or http://dx.doi.org/10.2139/ssrn.1285127

Edward F. Buffie (Contact Author)

Indiana University Bloomington - Department of Economics ( email )

Wylie Hall 105
107 S. Indiana Avenue
Bloomington, IN 47405-7000
United States
812-855-4848 (Phone)

Manoj Atolia

Florida State University - Department of Economics ( email )

Tallahassee, FL 30306-2180
United States
+1.850.644.7088 (Phone)
+1.850.644.4535 (Fax)

HOME PAGE: http://mailer.fsu.edu/~matolia/

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