This paper provides a political economy explanation for temporary exchange-rate-based stabilization programs (where the exchange rate is used as a nominal anchor) and their optimal duration by focusing on the distributive effects of real exchange rate appreciation. In a small-open-economy model, a temporary reduction in the devaluation rate leads to a reduction in the nominal interest rate and to a temporary appreciation of the real exchange rate. Owners of tradable-goods are hurt, thus opposing the stabilization plan. For reasonable parameter values, the owners of non-traded goods will support a temporary plan as their welfare improves.
BGIE
29 pages
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