01740cas a2200253 a 4500 AALejournalIMF008719 230101c9999 xx r poo 0 0eng d 5.00 USD 9781451844726 1018-5941 BD-DhAAL BD-DhAAL Vegh Gramont, Carlos. Stabilization Dynamics and Backward-Looking Contracts / Carlos Vegh Gramont, Guillermo Calvo. Washington, D.C. : International Monetary Fund, 1993. 1 online resource (38 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 stabilizations often result in an initial output expansion. One explanation for this phenomenon has been that, in the presence of inflation inertia, a reduction in the nominal interest rate causes the domestic real interest rate to fall, thus increasing aggregate demand. This paper reexamines this issue in the context of an intertemporal optimizing model. In contrast to previous results, the analysis shows that, if the intertemporal elasticity of substitution is smaller than the elasticity of substitution between traded and home goods, a permanent reduction in the rate of devaluation leads to a fall in aggregate demand. Mode of access: Internet Calvo, Guillermo. IMF Working Papers; Working Paper ; No. 1993/029 Full text available on IMF http://elibrary.imf.org/view/journals/001/1993/029/001.1993.issue-029-en.xml IMF e-Library