Devaluation Risk and the Syndrome of Exchange-Rate-Based Stabilizations / Enrique G. Mendoza, Martin Uribe.

Format:

Book

Author/Creator:

Mendoza, Enrique G.

Contributor:

National Bureau of Economic Research.

Uribe, Martin.

Series:

Working Paper Series (National Bureau of Economic Research) no. w7014.

NBER working paper series no. w7014

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1999.

Summary:

This paper shows that the risk of devaluation can be an important factor accounting for the stylized facts of exchange-rate-based stabilizations. This conclusion follows from studying the quantitative implications of a two-sector equilibrium business cycle model of a small open economy calibrated to Mexico's 1987-1994 stabilization plan. In the model a time-variant interest rate differential that acts as a stochastic tax on money demand, labor supply, investment, and saving. Under incomplete markets, this tax induces endogenous state-contingent wealth effects via fiscal adjustment and suboptimal investment. Devaluation risk entails large welfare costs in this environment.

Notes:

Print version record

March 1999.