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The Capital Inflows Problem Revisited: a Stylized Model of Southern Cone Disinflation

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TLDR
In this paper, the effects of a pre-announced exchange-rate oriented disinflation scheme can be studied, and it is shown that even when agents have perfect foresight and markets clear continuously, the "capital inflows" problem and the associated real appreciation may result.
Abstract
In the late 1970s countries in Latin America's Southern Cone attempted to lower domestic inflation rates through the progressive reduction of a preannounced rate of exchange-rate devaluation. The stabilization programs gave rise to massive capital inflows, real exchange-rate appreciation, and current-account deficits. This paper develops a stylized intertemporal framework in which the effects of a preannounced exchange-rate oriented disinflation scheme can be studied. It is shown that even when agents have perfect foresight and markets clear continuously, the "capital inflows" problem and the associated real appreciation may result.While unanticipated, permanent inflation changes are neutral in the paper,anticipated inflation is neutral only in exceptional circumstances. A preannounced disinflation operates by altering the path of an expenditure -based real domestic interest rate that depends on expected changes in the prices of liquidity services and nontradable consumption goods. Alternatively, by raising future real balances, anticipated disinflation may cause an incipient change in the time path of consumption's marginal utility, leading agents to revise consumption plans. It is noteworthy that disinflation's long-run effect on the real exchange rate more than reverses its short-run effect. If disinflation occasions a real appreciation on impact, say, the relative price of tradables must rise in the long run so that the economy can service the additional external debt incurred in the transition period.

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Stopping High Inflation; An Analytical Overview

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Temporary Stabilization: Predetermined Exchange Rates

TL;DR: In this paper, the authors analyzed the impact of a stabilization policy based on a temporary reduction in the rate of devaluation in a one-good, cash-in-advance model, with perfect capital mobility and Ramsey-type consumers.
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Exchange Rate Management and Stabilization Policies in Developing Countries

TL;DR: This article showed that a successful devaluation raises the real (in terms of domestic goods) debt service burden, causing a Krugman-Taylor like contractionary effect on aggregate demand, while a cut in aggregate supply leads to upward pressure on inflation while a reduction in aggregate demand tends to abate inflation.
References
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Debt, Deficits and Finite Horizons

TL;DR: In this article, the effects of the horizon index on the steady state interest rate and the dynamic effects of government deficit finance on the economic system were investigated and a simple analytical model was developed in which the horizon of agents is a parameter which can be chosen arbitrarily.
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Anticipated inflation and the capital stock in a cash in-advance economy

TL;DR: In this article, the steady state capital stock is inversely related to the rate of inflation, as a result that is directly opposite the usual conclusion that an economy is constructed in which the steady-state capital stock of a firm is positively related to its inflation rate.
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Functional equivalence between liquidity costs and the utility of money

TL;DR: In this article, the authors demonstrate a functional equivalence between using real balances as an argument of the utility function and entering money into liquidity costs which appear in the budget constraint, which can be approximately derived from conventional models of money demand, such as the transactions and precautionary models.
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The Terms of Trade and the Current Account: The Harberger-Laursen-Metzler Effect

TL;DR: In this paper, the authors examined the effect of terms of trade changes on a small country's spending and current account, assuming optimizing behavior in an intertemporal framework with perfect international capital mobility.
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