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Why Do Many Disinflations Fail? the Importance of Luck, Timing, and Political Institutions

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  • A. Javier Hamann
  • Alessandro Prati

Abstract

Many inflation stabilizations succeed only temporarily. Using a sample of 51 episodes of stabilization from inflation levels above 40 percent, we show that most of the failures are explained by bad luck, unfavorable initial conditions, and inadequate political institutions. The evolution of trading partners'' demand and U.S. interest rates captures the effect of bad luck. Past inflation affects the outcome in two different ways: a long history of high inflation makes failure more likely, while a high level of inflation prior to stabilization increases the chances of success. Countries with short-lived political institutions, a weak executive authority, and proportional electoral rules also tend to fail. After controlling for all these factors, we find that exchange-rate-based stabilizations are more likely to succeed. These findings are robust across measures of failure (two dichotomous and one continuous), sample selection criteria, and estimation techniques, including Heckman''s correction for the endogeneity of the anchor.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 02/228.

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Length: 64
Date of creation: 01 Dec 2002
Date of revision:
Handle: RePEc:imf:imfwpa:02/228

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Related research

Keywords: Disinflation; stabilization; inflation; inflation stabilization; high inflation; inflation stabilizations; terms of trade; monetary policy; low inflation; inflation rate; reduction in inflation; high inflations; inflation performance; annual inflation; inflation preferences; terms of trade shocks; real exchange rates; moderate ? inflation; foreign exchange; inflation rates; costs of inflation; price liberalizations; lower inflation; price level; measure of inflation; inflation crisis; actual inflation; monetary aggregate; domestic prices; monetary economics; chronic inflation; inflation tax;

References

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Citations

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Cited by:
  1. Federico Ravenna, 2005. "The European Monetary Union as a Commitment Device for New EU Member States," Working Papers 98, Oesterreichische Nationalbank (Austrian Central Bank).
  2. Alessandra Bonfiglioli & Gino Gancia, 2010. "The political cost of reforms," Economics Working Papers 1250, Department of Economics and Business, Universitat Pompeu Fabra, revised Jun 2011.
  3. Miguel Rueda, 2008. "Credibilidad en la política monetaria: Papel de políticas en la estabilidad del Presidente del Banco Central," Research Department Publications 4586, Inter-American Development Bank, Research Department.
  4. Miguel Rueda, 2008. "Breaking Credibility in Monetary Policy: The Role of Politics in the Stability of the Central Banker," Research Department Publications 4585, Inter-American Development Bank, Research Department.
  5. Alberto Alesina & Silvia Ardagna & Francesco Trebbi, 2006. "Who Adjusts and When? On the Political Economy of Reforms," NBER Working Papers 12049, National Bureau of Economic Research, Inc.
  6. Witold Jakóbik, 2007. "On the Fundamental Principles of Economic Policy," Contemporary Economics, University of Finance and Management in Warsaw, vol. 1(2), June.
  7. Francisco José Veiga, 2003. "The Political Economy of Failed Stabilization," NIPE Working Papers 13/2003, NIPE - Universidade do Minho.

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