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In Argentina, increases in inflation appear to be closely linked to government attempts to increase seigniorage (government revenues from issuing money). The implication? Any serious stabilization effort requires finding an alternative source of revenue to replace the inflation tax.
The repeated use of price and wage controls is likely to destabilize inflation in the medium run. The similar cyclical pattern of inflation observed in the aftermath of the failures of the Austral plan in Argentina and the Cruzado plan in Brazil is mostly linked to anticipations about the introduction of price controls. The heterodox approach is risky if not accompanied by an adequate adjustment in the budget deficit.
Rampant inflation is a major economic problem in many of the less developed countries; two out of three attempts to stabilize these economies fail. Inflation Stabilization provides a valuable description and a critical analysis of the disinflation programs introduced in Argentina, Bolivia, Brazil, and Israel in 1985-86, and discusses the possibility of such a program in Mexico. It documents the initial steps in stabilization as well as the reasons for failure.As architects of the programs, several of the authors are in key positions to assess which aspects were critical in getting the programs accepted and where to look for difficulties and failures. In Israel, inflation was halted without recession. The challenge to policy makers today is in shifting from stabilization to the revival of sustained growth. This experience is described fully by Michael Bruno and Sylvia Piterman, who examine the critical issue of exchange rates, and by Alex Cukierman, who uses modeling to analyze the interaction of money, wages, prices, and activity under rational expectations that take the government's policy objectives into account.Endemic inflation and a sudden increase in external debt burden Argentina's economy, raising the wider issues of high inflation economies and stabilization that are discussed in the chapter by José Luis Machinea and that by Guido Di Tella and Alfredo Canavese.Eduardo Modiano and Mario Simonsen take up issues of wages in Brazil, particularly the problem of finding an equitable way to deal with a wage freeze; Simonsen develops an ambitious game theoretic rationalization of incomes policy as a coordinating device for imperfectly competitive economies. Bolivia did reach hyperinflation (price increases of more than 50 percent each month) before stabilizing. Juan Antonio Morales shows how stabilizing the exchange rate, in an economy where all pricing was already geared to the dollar, achieved stabilization without a wage or price freeze. And Francisco Gil Diaz asks whether an incomes-policy based program could work to control ever increasing inflation in Mexico.
Originally presented as the author's thesis (doctoral)--Universiteat Hohenheim, 2006.
Why did the Austral plan fail to curb inflation on a sustained basis? Sophistication in the design of a stabilization program is no substitute for addressing fundamental imbalances, contends the author -- and price controls, improperly used, can make the problem worse.
The elasticity of substitution in transactions between money and bonds is a crucial determinant of the seigniorage- maximizing inflation rate and of whether the semi- elasticity of money demand with inflation increases with inflation.