Real Effects of Exchange-Rate-Based Stabilization: An Analysis of Competing Theories

This paper uses a unified analytical framework to assess, both qualitatively and quantitatively, the relevance of the different hypotheses that have been proposed to explain the real effects of exchange-rate-based stabilizations. The four major hypotheses analyzed are: (1) the supply-side effects associated with an inflation decline; (2) the perception that the exchange-rate peg is temporary; (3) the fiscal adjustments that tend to accompany the peg; and (4) the existence of nominal rigidities in wages or prices.