International Finance Discussion Papers (IFDP)
March 1996
High Real Interest Rates in the Aftermath of Disinflation: Is It a Lack of Credibility?
Graciela L. Kaminsky and Leonardo Leiderman
Abstract:
High real interest rates have been observed in many countries for several months after the adoption of disinflation programs. While they may reflect primarily a liquidity crunch, high ex post real interest rates can also be explained in terms of an ex post error in inflation expectations that reflects a lack of credibility of the low-inflation policy. The latter hypothesis is tested using data for Argentina, Israel, and Mexico during the implementation of the stabilization programs in the mid-1980s.
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