Disinflation and the Supply Side
The authors study the dynamics of output, consumption, and real wages induced by a disinflation program based on permanent and temporary reductions in the nominal devaluation rate. They use an intertemporal optimizing model of a small open economy...
| Main Authors: | , |
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| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2014
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2000/03/437968/disinflation-supply-side http://hdl.handle.net/10986/19846 |
| Summary: | The authors study the dynamics of
output, consumption, and real wages induced by a
disinflation program based on permanent and temporary
reductions in the nominal devaluation rate. They use an
intertemporal optimizing model of a small open economy in
which domestic households face imperfect world capital
markets, the labor supply is endogenous, and wages are
flexible. The model predicts that, with a constant capital
stock and no investment, there is an initial reduction in
real wages and output expands. Consumption falls on impact
but increases afterward. In addition, with a temporary
shock, a current account deficit emerges and, later a
recession sets in, as documented in various studies. With
endogenous capital accumulation, numerical simulations show
that the model can also predict a boom in investment. |
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