The Behavior Of Real Interest Rates In Exchange Rate Based Stabilization Programs
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The Behavior of Real Interest Rates in Exchange-Rate Based Stabilization Programs
Author: Pierre-Richard Agénor
language: en
Publisher: International Monetary Fund
Release Date: 1994-06-01
This paper examines the behavior of real interest rates in exchange-rate based stabilization programs. The analysis is based on a model with imperfect capital mobility and optimizing agents. A permanent reduction in the devaluation rate is first shown to have an ambiguous effect on real interest rates on impact. The analysis is then extended to consider a stabilization program characterized by an initial reduction in the rate of devaluation of the nominal exchange rate, and the announcement of a future increase in income taxes. The impact effect on real interest rates is shown to depend upon the degree of credibility of the announcement. Real interest rates may fall if agents do not believe that taxes will be raised, and rise if the future tax reform is sufficiently credible.
Working Paper Summaries (WP/94/1 - WP/94/76)
Author: International Monetary Fund
language: en
Publisher: International Monetary Fund
Release Date: 1994-08-01
The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.
The Behavior of Real Interest Rates in Exchange-Rate-Based Stabilization Programs
This paper examines the behavior of real interest rates at the inception of exchange-rate-based stabilization programs. The analysis is based on an optimizing model of a small open economy facing imperfect world capital markets. A reduction in the devaluation rate is shown to have a positive impact on real interest rates. By contrast, a program characterized by an initial reduction in the devaluation rate and a perceived future increase in government spending has an ambiguous effect - which depends in particular on the degree of credibility of the fiscal policy stance.