The Behavior of Real Interest Rates in Exchange-Rate-Based Stabilization Programs

19 Pages Posted: 30 Dec 2003

See all articles by Pierre-Richard Agenor

Pierre-Richard Agenor

University of Manchester - School of Social Sciences

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Abstract

This paper examines the behavior of real interest rates at the inception of exchange-rate-based stabilization programs. The analysis is based on an optimizing model of a small open economy facing imperfect world capital markets. A reduction in the devaluation rate is shown to have a positive impact on real interest rates. By contrast, a program characterized by an initial reduction in the devaluation rate and a perceived future increase in government spending has an ambiguous effect - which depends in particular on the degree of credibility of the fiscal policy stance.

Suggested Citation

Agenor, Pierre-Richard, The Behavior of Real Interest Rates in Exchange-Rate-Based Stabilization Programs. Review of Development Economics, Vol. 2, pp. 231-249, October 1998. Available at SSRN: https://ssrn.com/abstract=468297

Pierre-Richard Agenor (Contact Author)

University of Manchester - School of Social Sciences ( email )

Oxford Road
Manchester, M13 9PL
United Kingdom

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