TY  - JOUR
AU  - Mendoza,Enrique G.
AU  - Uribe,Martin
TI  - Devaluation Risk and the Syndrome of Exchange-Rate-Based Stabilizations
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 7014
PY  - 1999
Y2  - March 1999
UR  - http://www.nber.org/papers/w7014
L1  - http://www.nber.org/papers/w7014.pdf
N1  - Author contact info:
Enrique G. Mendoza
Department of Economics
University of Pennsylvania
3718 Locust Walk
Philadelphia, PA 19104
Tel: 215-898-7701
E-Mail: egme@sas.upenn.edu

Martin Uribe
Department of Economics
Columbia University
International Affairs Building
New York, NY 10027
Tel: 212 851 4008
Fax: 212 854 8059
E-Mail: martin.uribe@columbia.edu
AB  - 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.
ER  -