On the Political Economy of Temporary Stabilization Programs

Laura  Alfaro

Article | Economics & Politics

On the Political Economy of Temporary Stabilization Programs

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;

Format: Print

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Citation:

Alfaro, Laura. "On the Political Economy of Temporary Stabilization Programs." Economics & Politics 14, no. 2 (July 2002): 133–161.

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On the Political Economy of Temporary Stabilization Programs

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