Losing Credibility: The Stabilization Blues
44 Pages Posted: 15 Feb 2006
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Losing Credibility: The Stabilization Blues
Date Written: September 1992
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: Suggested Citation