Exchange-Rate-Based Stabilization - Acritical Look at the Stylized Facts

In recent years, several articles have identified a set of empirical regularities that arise during exchange rate-based stabilization (ERBS) in high inflation countries. These empirical regularities are presumably not observed when the inflation stabilization strategy does not rely on the use of the exchange rate and are, thus, commonly referred to as the ERBS "syndrome."2 The main features of the syndrome include a boom-bust cycle (as opposed to the initial recessionary effects of...
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In recent years, several articles have identified a set of empirical regularities that arise during exchange rate-based stabilization (ERBS) in high inflation countries. These empirical regularities are presumably not observed when the inflation stabilization strategy does not rely on the use of the exchange rate and are, thus, commonly referred to as the ERBS "syndrome."2 The main features of the syndrome include a boom-bust cycle (as opposed to the initial recessionary effects of money-based stabilizations); a consumption (and sometimes also an investment) boom; a pronounced real exchange rate appreciation; and worsening trade and current account balances. In addition, the literature points out that there is a particularly high incidence of failure among ERBS in high inflation countries.