Real Effects of Exchange Rate-Based Stabilization: An Analysis of Competing Theories
60 Pages Posted: 13 Jul 2000 Last revised: 23 Sep 2010
Date Written: July 1995
This paper uses a unified analytical framework to assess, both qualitatively and quantitatively, the relevance of the different hypotheses that have been proposed to explain the real effects of exchange rate-based stabilizations. The four major hypotheses analyzed are: (i) the supply-side effects associated with an inflation decline; (ii) the perception that the exchange rate peg is temporary; (iii) the fiscal adjustments that tend to accompany the peg; and (iv) the existence of nominal rigidities in wages or prices.
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