ON EXCHANGE-RATE STABILIZATION

This paper extends Calvo's (1986) and Obstfeld's (1985) analyses of stabilization policies through predetermined exchange rates in a few directions. The graphic and analytical techniques used here make it possible to perform a variety of policy experiments under a general utility function and in the presence of a consumer durable good (or under time-nonseparable preferences). It also shows that the dynamic process of exchange-rate stabilization exhibits hysteresis effects. That is, the steady-state behavior of the economy depends on the initial condition and a temporary stabilization policy has a permanent effect on the economy. © 1991.