Exchange Rate-Based Stabilizations: A Literature Review

Abstract

The exchange rate-based stabilizations (ERBSs) that have been undertaken in chronic inflation countries have generated a controversial body of literature regarding the effects of disinflation programs, especially those on real consumption and output. This survey provides an extensive overview of the literature on ERBS. The paper covers various empirical studies that have attempted to document the macroeconomic regularities associated with ERBS, discussing both their strengths and their weaknesses. It analyzes diverse theoretical models that have been put forward to replicate the business cycles associated with ERBS, and sheds light on which models perform better using real data. The results suggest that durables incorporated weak credibility and sticky price model proves to be most compatible with the empirical regularities observed in the course of ERBS.