Why governments implement temporary stabilization programs?
By: Laura Alfaro
Contributors: Harvard Business School. Division of Research
Series: Working paper / Division of Research, Harvard Business School -- 01-036; Working paper (Harvard Business School. Division of Research) -- 01-036
Publisher: Division of Research, Harvard Business School
Published: 2001
Place of publication: Boston
Language: eng
Number of pages: 28
Description: This paper provides a political economy explanation for temporary exchange-rate-based stabilization programs (where the exchange rate is used as a nominal anchor) and their optimal duration by focusing on the distributive effects of real exchange rate appreciation. In a small-open-economy model, a temporary reduction in the devaluation rate leads to a reduction in the nominal interest rate and to a temporary appreciation of the real exchange rate. Owners of tradable-goods are hurt, thus opposing the stabilization plan. For reasonable parameter values, the owners of non-traded goods will support a temporary plan as their welfare improves.
Notes: Includes bibliographical references.