Disinflation and the Supply Side

39 Pages Posted: 20 Apr 2016

See all articles by Lodovico Pizzati

Lodovico Pizzati

World Bank

Pierre-Richard Agenor

University of Manchester - School of Social Sciences

Date Written: March 2000

Abstract

What role do supply-side factors play in the dynamics of output and absorption in exchange rate-based stabilization programs?

AgEnor and Pizzati study the dynamics of output, consumption, and real wages induced by a disinflation program based on permanent and temporary reductions in the nominal devaluation rate.

They use an intertemporal optimizing model of a small open economy in which domestic households face imperfect world capital markets, the labor supply is endogenous, and wages are flexible.

The model predicts that, with a constant capital stock and no investment, there is an initial reduction in real wages and output expands. Consumption falls on impact but increases afterward.

In addition, with a temporary shock, a current account deficit emerges and, later, a recession sets in, as documented in various studies.

With endogenous capital accumulation, numerical simulations show that the model can also predict a boom in investment.

This paper is a product of the Economic Policy and Poverty Reduction Division, World Bank Institute. The authors may be contacted at pagenor@worldbank.org and lpizzati@worldbank.org.

Suggested Citation

Pizzati, Lodovico and Agenor, Pierre-Richard, Disinflation and the Supply Side (March 2000). World Bank Policy Research Working Paper No. 2304. Available at SSRN: https://ssrn.com/abstract=629154

Lodovico Pizzati (Contact Author)

World Bank ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

Pierre-Richard Agenor

University of Manchester - School of Social Sciences ( email )

Oxford Road
Manchester, M13 9PL
United Kingdom

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