This paper presents a model of price stabilization applicable to less-developed economies. Distinctive features of the model are: (i) its explicit incorporation of a commercial banking system, (ii) its specification that the actual rate of inflation depends on inflationary expectations and on excess demand for output, and (iii) endogeneity of the growth rate of real output. Numerical simulations are also conducted. We demonstrate that stabilization through an initial increase in the average nominal interest rate paid on money holdings has significantly more favorable short-run effects on real output than does stabilization through an initial reduction in the rate of monetary expansion.

This paper models a typical highly inflationary less developed economy, in which monetary forces are the result of three policy determinants: the rate of monetary expansion (µ), the interest rate on bank deposits (d), and the rate of depreciation of the real exchange rate (υ). The task confronting policy-makers is to reduce the equilibrium inflation rate without undue transitional sacrifice of the growth objective. We demonstrate that this optimally requires the precise coordination of all three instruments, with high but declining values of d and µ being adopted initially, and with υ being modulated so as to forestall excessive capital inflows and to influence favorably the evolution of relative input prices.

Journal Article Monetary Policy in an Inside-Money, Open Economy: Comment Get access Basant K. Kapur Basant K. Kapur National University of Singapore Search for other works by this author on: Oxford Academic Google Scholar The Quarterly Journal of Economics, Volume 96, Issue 2, May 1981, Pages 349–356, https://doi.org/10.2307/1882395 Published: 01 May 1981

This paper presents a model of price stabilization applicable to less-developed economies. Distinctive features of the model are: (i) its explicit incorporation of a commercial banking system, (ii) its specification that the actual rate of inflation depends on inflationary expectations and on excess demand for output, and (iii) endogeneity of the growth rate of real output. Numerical simulations are also conducted. We demonstrate that stabilization through an initial increase in the average nominal interest rate paid on money holdings has significantly more favorable short-run effects on real output than does stabilization through an initial reduction in the rate of monetary expansion.