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The Business Cycle Associated.with Exchange Rate-Based Stabilizations

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  • Kiguel, Miguel A
  • Liviatan, Nissan
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    Abstract

    This article examines the effects of disinflation on economic activity in countries characterized by chronic inflation. Such countries have a long history of inflation at rates exceeding those in industrial countries as well as labor and capital markets that have adjusted to function in an inflationary environment. A sample of disinflation programs in several Latin American countries and in Israel demonstrates that stabilization efforts in countries with chronic inflation often do not induce the usual Phillips curve tradeoff in the medium run. Specifically, stabilization programs that use the exchange rate as the main nominal anchor are often associated with a business cycle that begins with a boom and ends with a recession. Stabilization programs that use money supply as the nominal anchor generally induce the expected Phillips curve result: lower inflation is accompanied by a recession after the program is implemented. Copyright 1992 by Oxford University Press.

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    Bibliographic Info

    Article provided by World Bank Group in its journal World Bank Economic Review.

    Volume (Year): 6 (1992)
    Issue (Month): 2 (May)
    Pages: 279-305

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    Handle: RePEc:oup:wbecrv:v:6:y:1992:i:2:p:279-305

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