Temporary Stabilizations, Sudden Stops, and Asset Prices |
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Authors: | Rajesh Singh Chetan Subramanian |
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Institution: | Department of Economics, Iowa State University, USA; Department of Economics, USA |
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Abstract: | The authors study a temporary exchange-rate based stabilization plan in which agents face a sudden stop of capital inflows. The model generates a rising path of real interest rates in advance of the exchange rate collapse. This generates a time-dependent non-monotonic path of required premium on domestic assets. The model-generated asset price dynamics closely mimic their empirical counterpart, as witnessed during recent collapses of exchange-rate based stabilization plans. The model also reproduces consumption and foreign reserve dynamics that closely mimic the data. |
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