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<p>We build a dynamic general equilibrium model of a small open economy to study exchange rate-based inflation stabilization. The model accounts for credibility issues, durability in consumption, and supply-side effects in policy transmission. Our results show boom-bust cycles in consumption, output, and current account, in line with stylized facts from developing economies that underwent stabilization periods. Importantly, policy responses are consistent with data only when credibility, durability, and supply channels are present at the same time. We present applications of our model to discuss the severity of credibility problems and external monetary policy.</p>

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Exchange rate-based inflation stabilization: Theory and practical applications

  • 期刊论文

  • 发表日期：

    2025年3月26日

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  • Omer Bayar,
  • Mohammed Mohsin

摘要

We build a dynamic general equilibrium model of a small open economy to study exchange rate-based inflation stabilization. The model accounts for credibility issues, durability in consumption, and supply-side effects in policy transmission. Our results show boom-bust cycles in consumption, output, and current account, in line with stylized facts from developing economies that underwent stabilization periods. Importantly, policy responses are consistent with data only when credibility, durability, and supply channels are present at the same time. We present applications of our model to discuss the severity of credibility problems and external monetary policy.