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Temporary Stabilizations, Sudden Stops, and Asset Prices
Author(s) -
Singh Rajesh,
Subramanian Chetan
Publication year - 2009
Publication title -
review of development economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.531
H-Index - 50
eISSN - 1467-9361
pISSN - 1363-6669
DOI - 10.1111/j.1467-9361.2008.00491.x
Subject(s) - economics , exchange rate , asset (computer security) , sudden stop , monetary economics , interest rate , capital (architecture) , consumption (sociology) , path (computing) , capital flows , econometrics , microeconomics , computer science , profit (economics) , social science , computer security , archaeology , sociology , history , programming language
The authors study a temporary exchange‐rate based stabilization plan in which agents face a sudden stop of capital inflows. The model generates a rising path of real interest rates in advance of the exchange rate collapse. This generates a time‐dependent non‐monotonic path of required premium on domestic assets. The model‐generated asset price dynamics closely mimic their empirical counterpart, as witnessed during recent collapses of exchange‐rate based stabilization plans. The model also reproduces consumption and foreign reserve dynamics that closely mimic the data.