Exchange Rate-Based Stabilization in War-Ravaged Economies: The Case of Lebanon

This article examines exchange rate-based stabilization in an economy that has been badly destroyed by war or other calamities. The article does this in the context of post-civil war Lebanon. Both Iraq and Afghanistan are prime candidates for such a policy. This article first demonstrates the validity of the theory and empirical regularities (initial boom followed by an economic contraction) in the case of Lebanon and argues for the suitability of such programs for war-ravaged economies. It then empirically highlights the role played by the credibility of policy makers in the success or failure of the program and the resulting dynamics of economic variables. The article concludes that the success depends on a political environment that engenders credible policy. JEL Classification Codes: E63, F41, O24, O53 * I would like to thank Jeff Nugent and Selo Imrohoroglu for helpful comments on an earlier version of this article. 2 American Review of Political Economy