Habit Formation and the Comovement of Prices and Consumption During Exchange-Rate-Based Stabilization Programs

32 Pages Posted: 11 Jun 1998

See all articles by Martín Uribe

Martín Uribe

Columbia University - Graduate School of Arts and Sciences - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: March 12, 1998

Abstract

A defining stylized fact associated with exchange-rate-based (ERB) stabilization programs is that their initial phase is characterized by several years of expansion in private consumption and a gradual appreciation of the real exchange rate. In this paper, I argue that standard optimizing models are unable to account for this empirical regularity, as they predict that, except for the date of announcement of the program, an appreciation of the real exchange rate must necessarily be accompanied by a decline in consumption. I show that this price-consumption problem can be resolved by relaxing the assumption of time separability in preferences. Specifically, under habit formation a permanent ERB program generates a smooth boom in consumption and gradual real exchange rate appreciation. A temporary program induces, in addition, a smooth boom-recession cycle with the recession beginning before the abandonment of the program.

JEL Classification: F41

Suggested Citation

Uribe, Martin, Habit Formation and the Comovement of Prices and Consumption During Exchange-Rate-Based Stabilization Programs (March 12, 1998). Available at SSRN: https://ssrn.com/abstract=97208 or http://dx.doi.org/10.2139/ssrn.97208

Martin Uribe (Contact Author)

Columbia University - Graduate School of Arts and Sciences - Department of Economics ( email )

420 W. 118th Street
1022 International Affairs Building, MC 3308
New York, NY 10027
United States
212-851-4008 (Phone)
212-854-8059 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
77
Abstract Views
819
rank
342,782
PlumX Metrics