Article | Economics & Politics | July 2002

On the Political Economy of Temporary Stabilization Programs

by Laura Alfaro

Abstract

This paper provides a political economy explanation for temporary exchange-rate-based stabilization programs by focusing on the distributional effects of real exchange-rate appreciation. I propose an economy in which agents are endowed with either tradable or nontradable goods. Under a cash-in-advance assumption, a temporary reduction in the devaluation rate induces a consumption boom accompanied by real appreciation, which hurts the owners of tradable goods. The owners of nontradables have to weigh two opposing effects: an increase in the present value of nontradable goods wealth and a negative intertemporal substitution effect. For reasonable parameter values, owners of nontradables are better off.

Keywords: Government and Politics; Economy; Balance and Stability; Programs; Currency Exchange Rate; Cash; Value; Distribution;

Citation:

Alfaro, Laura. "On the Political Economy of Temporary Stabilization Programs." Economics & Politics (July 2002).