@techreport{NBERw7014,
 title = "Devaluation Risk and the Syndrome of Exchange-Rate-Based Stabilizations",
 author = "Enrique G. Mendoza and Martin Uribe",
 institution = "National Bureau of Economic Research",
 type = "Working Paper",
 series = "Working Paper Series",
 number = "7014",
 year = "1999",
 month = "March",
 URL = "http://www.nber.org/papers/w7014",
 abstract = {This paper shows that the risk of devaluation can be an important factor accounting for the stylized facts of exchange-rate-based stabilizations.  This conclusion follows from studying the quantitative implications of a two-sector equilibrium business cycle model of a small open economy calibrated to Mexico's 1987-1994 stabilization plan.  In the model a time-variant interest rate differential that acts as a stochastic tax on money demand, labor supply, investment, and saving. Under incomplete markets, this tax induces endogenous state-contingent wealth effects via fiscal adjustment and suboptimal investment.  Devaluation risk entails large welfare costs in this environment.},
}