This paper uses an error-correction model of Mexican inflation to decompose the real appreciation of the peso during 1988-1994 into that part attributable to the peso's initial underevaluation, that part explained by growing domestic demand, and that part attributable to backward-looking...

"This paper addresses the impact of monetary policy on exchange rates during financial crises. Some observers have argued that a tightening of monetary policy is necessary to stabilize the exchange rate, restore confidence, and lay the groundwork for an eventual recovery of economic activity....

Exchange-rate based stabilizations, while useful in accelerating the disinflation process, typically lead to overvalued exchange rates and large current account deficits. These factors, in turn, make it difficult to sustain exchange rate pegs, placing heavy demands upon monetary policy to...