Interactions Between Inflation and Trade-Regime Objectives in Stabilization Programs

Abstract

This paper examines the relationship between macroeconomic objectives of controlling inflation and trade-regime objectives in stabilization programs of developing countries.It is seen that there need be, in principle, no close relationship between the two, as a crawling peg exchange-rate policy can prevent inflation from affecting the performance of the foreign sector.In practice, trade regime objectives have been linked with inflation-reducing objectives, often to the detriment of resource allocation and growth.Differences between devaluation under liberalized regimes and under exchange control are also examined.

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