Working Paper: NBER ID: w13177
Authors: Guillermo A. Calvo
Abstract: The paper examines the robustness of Interest Rate Rules, IRRs, in the context of an imperfectly credible stabilization program, closely following the format of much of the literature in open-economy models, e.g., Calvo and Végh (1993 and 1999). A basic result is that IRRs, like Exchange Rate Based Stabilization, ERBS, programs, could give rise to macroeconomic distortion, e.g., underutilization of capacity and real exchange rate misalignment. However, while under imperfect credibility EBRS is associated with overheating and current account deficits, IRRs give rise to somewhat opposite results. Moreover, the paper shows that popular policies to counteract misalignment, like Strategic Foreign Exchange Market Intervention or Controls on International Capital Mobility may not be effective or could even become counterproductive. The bottom line is that the greater exchange rate flexibility granted by IRRs is by far not a sure shot against the macroeconomic costs infringed by imperfect credibility.
Keywords: No keywords provided
JEL Codes: E52; E58; F32; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Interest Rate Rules (IRRs) (E43) | underutilization of capacity (D24) |
| Interest Rate Rules (IRRs) (E43) | current account surpluses (F32) |
| Interest Rate Rules (IRRs) (E43) | macroeconomic distortions (E19) |
| exchange rate-based stabilization (ERBS) programs (F33) | overheating (Y60) |
| exchange rate-based stabilization (ERBS) programs (F33) | current account deficits (F32) |
| strategic foreign exchange market intervention (F31) | misalignments caused by IRRs (L15) |
| capital controls (F38) | misalignments caused by IRRs (L15) |
| Interest Rate Rules (IRRs) (E43) | adverse effects of imperfect credibility (D83) |