Disinflation and the Supply Side

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.

Bibliographic Details

Main Authors:	Agenor, Pierre-Richard, Lodovico, Pizzati
Language:	English en_US
Published:	World Bank, Washington, DC 2000-03
Subjects:	ASSETS, BORROWING, CAPITAL ACCUMULATION, CAPITAL GAINS, CAPITAL GOODS, CAPITAL MARKETS, CAPITAL MOBILITY, CAPITAL STOCK, CAPITAL- LABOR, CENTRAL BANK, CONSTANT RATE, CONSTANT RETURNS, CONSTANT RETURNS TO SCALE, CONSUMERS, CONSUMPTION INCREASES, COUNTRY RISK, CURRENT ACCOUNT BALANCE, CURRENT ACCOUNTS, DEBT, DECREASING RETURNS, DEFICITS, DEMAND ELASTICITY, DEVALUATION, DISINFLATION, DYNAMIC MODEL, EARNINGS, ELASTICITIES, ELASTICITY, ELASTICITY OF SUBSTITUTION, EMPIRICAL EVIDENCE, EMPIRICAL STUDIES, EMPLOYMENT, ENDOGENOUS VARIABLE, EQUILIBRIUM, EXCESS DEMAND, EXCHANGE RATE, EXCHANGE RATE APPRECIATION, EXTERNAL DEBT, FIRST YEAR, FOREIGN ASSETS, FOREIGN CURRENCY, GOVERNMENT BONDS, GOVERNMENT EXPENDITURE, GROSS INVESTMENT, IMPORTS, INCOME, INCOME EFFECT, INCREASE IN LABOR, INFLATION RATE, INTEREST RATE, LABOR SUPPLY, LEISURE, LEVEL OF OUTPUT, MARGINAL COST, MARGINAL PRODUCT, MARGINAL PRODUCTIVITY, MARGINAL UTILITY, MARGINAL VALUE, MARKET VALUE, MONEY BALANCES, MONEY DEMAND, MONEY MARKET, MONEY STOCK, MONEY SUPPLY, NET INCOME, NET INVESTMENT, NET WORTH, NOMINAL INTEREST RATE, NOMINAL INTEREST RATES, NUMERICAL SIMULATIONS, OFFICIAL RESERVES, OPPORTUNITY COST, PRESENT PRICES, PRESENT VALUE, PRIVATE CONSUMPTION, PRODUCERS, PRODUCTION FUNCTION, PRODUCTION INPUTS, PRODUCTION PROCESS, PRODUCTION TECHNOLOGY, RATE OF RETURN, REAL EXCHANGE RATE, REAL INTEREST RATE, REAL RATE OF INTEREST, REAL WAGE, REAL WAGES, RECESSION, RESERVES, RISK PREMIUM, SCENARIOS, SIDE EFFECTS, SIMULATION TECHNIQUES, STABILIZATION, STABILIZATION PROGRAMS, STATE EQUILIBRIUM, SUPPLY CURVE, TOTAL CONSUMPTION, TOTAL OUTPUT, TRADE BALANCE, TRADE DEFICIT, UTILITY FUNCTION, WAGES, WEALTH,
Online Access:	http://documents.worldbank.org/curated/en/2000/03/437968/disinflation-supply-side https://hdl.handle.net/10986/19846
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