02252cas a2200241 a 4500 AALejournalIMF008436 230101c9999 xx r poo 0 0eng d 5.00 USD 9781451857054 1018-5941 BD-DhAAL BD-DhAAL Celasun, Oya. Sticky Inflation and the Real Effects of Exchange Rate Based Stabilization / Oya Celasun. Washington, D.C. : International Monetary Fund, 2003. 1 online resource (34 pages) IMF Working Papers <strong>Off-Campus Access:</strong> No User ID or Password Required <strong>On-Campus Access:</strong> No User ID or Password Required Electronic access restricted to authorized BRAC University faculty, staff and students Exchange rate-based inflation stabilization (ERBS) policies are associated with a boom-recession cycle in economic activity and sustained real exchange rate appreciation. A class of models in the literature has explained these empirical regularities with the lack of credibility of the stabilization plans. The lack-of-credibility models typically assume perfectly forward-looking pricing behavior without inflation stickiness and attribute the slow decline in inflation to the consumption boom that occurs due to the perceived temporariness of the ERBS policy. This paper tests the empirical validity of forward-looking pricing behavior in Mexico and Turkey, two countries which have experienced ERBS. It finds that the forward- and backward-looking components of inflation weigh approximately equally in pricing behavior, and therefore, that inflation is partially sticky. The paper then develops the theoretical implications of partial inflation stickiness in a lack of credibility model of ERBS and concludes that the presence of stickiness significantly reduces the persistence of the consumption boom predicted by the model, but helps to explain the recession in the late phase of the stabilization. Mode of access: Internet IMF Working Papers; Working Paper ; No. 2003/151 Full text available on IMF http://elibrary.imf.org/view/journals/001/2003/151/001.2003.issue-151-en.xml IMF e-Library