Stabilization programs in chronic-inflation countries: Evidence from Latin America

Abstract

Chronic inflation has affected Latin America for decades, leading to many stabilization attempts. We develop a novel database with 46 stabilization/disinflation programs across 13 Latin American countries between 1970-2020. We classify them as failures, temporary stabilizations, and lasting stabilizations to study their differences. Our main findings are: 1) programs have failed to stabilize very often; 2) the nominal exchange rate acts as a de facto anchor, decelerating faster than inflation; meaning that the real exchange rate appreciates during stabilization; 3) lasting stabilizations begin with stronger fiscal and balance of payments (BoP) positions; 4) lasting stabilizations are preceded by BoP and fiscal adjustments associated with high GDP contractions; 5) lasting stabilizations keep fiscal accounts balanced for several years after programs are launched; 6) stabilizations typically boost economic growth in the short run; 7) the current account of the BoP worsens during the stabilization process; 8) temporary stabilizations are interrupted by domestic currency depreciations; and 9) many stabilization experiences end up in currency crises despite their success in ending chronic inflation