Inflationary Rigidities and Orthodox Stabilization Policies: Lessons from Latin America |
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| Authors: | Kiguel Miguel A; Liviatan Nissan |
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| Institution: | Miguel A. Kiguel is an economist at the World Bank. Nissan Liviatan is a professor at Hebrew University of Jerusalem. The authors are grateful to Bela Balassa, Eduardo Borensztein, Victorio Corbo, Eli Kreis, Maurice Obstfeld, Guy Pfeffermann, Jeff Sachs, and Marcelo Selowsky for helpful comments on an earlier draft. The authors greatly benefited from discussions with Edgardo Barandarian and Sebastian Edwards. A fuller version of the analysis is given in Kiguel and Liviatan (1988). |
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| Abstract: | Orthodox stabilization programs in Latin American countrieshave been notoriously unsuccessful in combating inflation, despitethe imposition of stringent cuts in government deficits. Inmost cases inflation came down only slowly and temporarily,with concomitant declines in growth and employment. The Bolivianprogam, one of the only Latin American successes, is contrastedwith those of Argentina, Brazil, Chile, and Mexico. The problemsof dealing with chronic inflation are compared with those ofhyperinflationary countries, and the influence of price andwage rigidities, expectations, and credibility is explored.The study shows that fiscal restraint is a necessary but notsufficient condition for success, and that sound managementof nominal variables (the exchange rate and money supply) arealso necessary. The critical role of credibility is linked withprice and wage rigidities in the chronic inflation countries,whereas the unsustainability of hyperinflation is seen to increasethe credibility of and thus the potential for successful stabilizationprograms. |
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