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The Behavior of Real Interest Rates in Exchange‐Rate‐Based Stabilization Programs
Author(s) -
Agénor PierreRichard
Publication year - 1998
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.1539-6924.2005.00605.x-i1
Subject(s) - devaluation , economics , exchange rate , credibility , interest rate , real interest rate , monetary economics , small open economy , imperfect , interest rate parity , open economy , macroeconomics , government spending , government (linguistics) , fiscal policy , welfare , market economy , law , political science , linguistics , philosophy
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.