Exchange-rate-based-stabilization policy. The case of Lebanon

The purpose of my dissertation is to evaluate the Exchange-rate-based stabilization policy in Lebanon and to explain the circumstances that lead to its success. The dissertation accounts for the main stylized facts associated with Exchange-rate-based stabilization programs, and it relates them to the Lebanese experience. The behavior of key macroeconomic variables—current account, inflation and gross domestic product—in successful stabilization programs of Latin America resembles the behavior of those of Lebanon after the stabilization policy took effect. However, the experience of Lebanon showed no evidence that adopting exchange rate anchor can enhance fiscal discipline.; Furthermore, the dissertation develops an empirical analysis to test whether fixing the exchange rate has been a workable policy for Lebanon. This raises the question of how far the central bank can go in defending the currency. While an attack on a currency cannot be prohibited, good policies can reduce the vulnerability of a country to such attacks. Good macro economic policy combined with a high level of foreign reserves play a significant role in protecting the currency. The Lebanese case is unique in the sense that inconsistencies between economic fundamentals and macro economic policies are so obvious.{09} Lebanon has a high debt to GDP ratio, substantial fiscal deficit, huge current account deficit and low foreign reserves, and yet the stabilization program has held for almost twelve years. My results show that the survival of the stabilization program can be attributed to the quick convergence of the domestic rate of inflation to that of the rest of the world, which gave rise to accelerated economic activity. The credibility of the central bank of Lebanon to defend the currency lowered the rate of devaluation that resulted in an immediate and permanent reduction in the inflation rate. Had the central bank being non-credible, the stabilization policy would have resulted in an initial expansion of output, followed by a later recession, which did not occur in Lebanon.