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Originally presented as the author's thesis (doctoral)--Universiteat Hohenheim, 2006.
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.
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.
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.
Although accommodative policies and widespread indexation may account for the persistence of high inflation, they cannot explain changes in the inflation rate. This paper examines the causes of such changes for the high-inflation episodes immediately preceding the recent “heterodox” attempts at stabilization in Argentina, Brazil, and Israel. An attempt is made to distinguish between the “fiscal” and “balance of payments” views of the causes of high inflation by computing historical decompositions of these episodes based on vector autoregressions. In all three cases, the results indicate that nominal exchange rate shocks played the dominant role in triggering an acceleration of inflation.
Triple digit inflation poses the greatest threat to the economic prospects and to the political cohesion of Argentina, Brazil, and Israel. All three countries have extensive indexation, including linkage of wages to the inflation rate. This report discusses questions such as: What strategy offers the best hope for controlling inflation in each of these cases? Is deindexation necessary to curb inflation and how might it be achieved? What can be learned from previous attempts at monetary reform and deindexation? Now available directly from: IIE 11 Dupont Circle, NW Washington, DC 20036 Tel: (202) 328-9000