Inflationary rigidities and stabilization policies

Abstract

Latin American countries provide the best living laboratory to study inflationary processes and stabilization programs. The purpose of this paper is to analyze the experience with orthodox stabilization policies, which are based on a tight fiscal stance and not supported by a system of price controls. The analysis of these policies is structured as follows. Part I analyzes in detail the question of why purely orthodox policies were especially effective in stopping hyperinflation as opposed to chronic inflation processes. Part II turns to chronic inflation countries and analyzes three basic types of stabilization. The first type is based almost exclusively on fiscal adjustment. The second considers programs which employ nominal anchors in conjunction with fiscal adjustments. The third type examines the exchange rate based stabilizations which often evolve out of a monetary-fiscal package. In the final part of the paper, the authors consider the long run view which extends beyond specific programs and emphasizes the importance of persistence in fiscal discipline and in adherence to nominal anchors.Environmental Economics&Policies,Inflation,Banks&Banking Reform,Economic Stabilization,Economic Theory&Research