Losing Credibility: The Stabilization Blues

37 Pages Posted: 23 Nov 1998

See all articles by Pablo E. Guidotti

Pablo E. Guidotti

Ministry Of Economy, Public Works and Services, Argentina

Carlos A. Vegh

Johns Hopkins University - Paul H. Nitze School of Advanced International Studies (SAIS); University of Maryland - Department of Economics; University of California at Los Angeles; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: December 1997

Abstract

In exchange rate-based stabilization programs, credibility often follows a distinct time pattern. At first it rises as the highly visible nominal anchor provides a sense of stability and hopes run high for a permanent solution to the fiscal problems. Later, as the domestic currency appreciates in real terms and the fiscal problems are not fully resolved, the credibility of the program falls, sometimes precipitously. This paper develops a political-economy model that focuses on the evolution of credibility over time and is consistent with the pattern just described. Inflation inertia and costly budget negotiations play a key role in the model.

JEL Classification: F41

Suggested Citation

Guidotti, Pablo E. and Vegh, Carlos A., Losing Credibility: The Stabilization Blues (December 1997). Available at SSRN: https://ssrn.com/abstract=137529 or http://dx.doi.org/10.2139/ssrn.137529

Pablo E. Guidotti

Ministry Of Economy, Public Works and Services, Argentina ( email )

Hipolito Yrigoyen 250-5th Floor-Room 506
Buenos Aires, 1310
Argentina

Carlos A. Vegh (Contact Author)

Johns Hopkins University - Paul H. Nitze School of Advanced International Studies (SAIS) ( email )

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University of Maryland - Department of Economics ( email )

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University of California at Los Angeles ( email )

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