On the Political Economy of Temporary Stabilization Programs

Date Published:

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.