Exchange Rate Preannouncement and Keynesian Unemployment

Abstract

In 1978, Argentina, Chile and Uruguay adopted a stabilization policy based on exchange rate preannouncement. The aim of this paper is to study the consequences of such a policy from a analytical point of view. The paper stands on a two-sector disequilibrium model, in which there is a price level inertia in the labor market as well as in the non-traded goods market. The main stylized facts are reproduced. It is shown, particularly, that the exchange rate preannouncement had to give rise to an economic boom first, and a keynesian unemployment situation later.