Interest Rate Rules, Inflation Stabilization, and Imperfect Credibility: The Small Open Economy Case / Guillermo A. Calvo.

By:

Calvo, Guillermo A

Contributor(s):

National Bureau of Economic Research

Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w13177.Publication details: Cambridge, Mass. National Bureau of Economic Research 2007.Description: 1 online resource: illustrations (black and white)Subject(s):

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Abstract: The paper examines the robustness of Interest Rate Rules, IRRs, in the context of an imperfectly credible stabilization program, closely following the format of much of the literature in open-economy models, e.g., Calvo and Végh (1993 and 1999). A basic result is that IRRs, like Exchange Rate Based Stabilization, ERBS, programs, could give rise to macroeconomic distortion, e.g., underutilization of capacity and real exchange rate misalignment. However, while under imperfect credibility EBRS is associated with overheating and current account deficits, IRRs give rise to somewhat opposite results. Moreover, the paper shows that popular policies to counteract misalignment, like Strategic Foreign Exchange Market Intervention or Controls on International Capital Mobility may not be effective or could even become counterproductive. The bottom line is that the greater exchange rate flexibility granted by IRRs is by far not a sure shot against the macroeconomic costs infringed by imperfect credibility.

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Holdings
Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w13177 (Browse shelf(Opens below))	Not For Loan

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June 2007.

The paper examines the robustness of Interest Rate Rules, IRRs, in the context of an imperfectly credible stabilization program, closely following the format of much of the literature in open-economy models, e.g., Calvo and Végh (1993 and 1999). A basic result is that IRRs, like Exchange Rate Based Stabilization, ERBS, programs, could give rise to macroeconomic distortion, e.g., underutilization of capacity and real exchange rate misalignment. However, while under imperfect credibility EBRS is associated with overheating and current account deficits, IRRs give rise to somewhat opposite results. Moreover, the paper shows that popular policies to counteract misalignment, like Strategic Foreign Exchange Market Intervention or Controls on International Capital Mobility may not be effective or could even become counterproductive. The bottom line is that the greater exchange rate flexibility granted by IRRs is by far not a sure shot against the macroeconomic costs infringed by imperfect credibility.