On Credible Disinflation

We study the effects of a credible, gradual exchange rate based disinflation program in a two sector economy. After an initial real exchange rate depreciation, the reductions in the rate of devaluation reduce the monetary wedge generated by a cash in advance constraint, leading to a gradual increase in absorption that yields progressive real exchange rate appreciations and current account deficits. An initial boom in economic activity is not followed by a later contraction, as labor supply expands during the whole length of the program.
Publication date: November 1993
ISBN: 9781451851342
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Inflation , Money and Monetary Policy , inflation , exchange rate , real exchange rate , relative price , real wages

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