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Disinflation and the supply side

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  • Agenor, Pierre-Richard
  • Lodovico, Pizzati

Abstract

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.

Suggested Citation

  • Agenor, Pierre-Richard & Lodovico, Pizzati, 2000. "Disinflation and the supply side," Policy Research Working Paper Series 2304, The World Bank.
    • Handle: RePEc:wbk:wbrwps:2304
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    References listed on IDEAS

    as
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    Cited by:

    1. Sushanta Mallick & Mohammed Mohsin, 2010. "On the real effects of inflation in open economies: theory and empirics," Empirical Economics, Springer, vol. 39(3), pages 643-673, December.

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