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Disinflation and the Recession-Now-Versus-Recession-Later Hypothesis

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  • Carlos A. Végh Gramont
  • Alexander W. Hoffmaister

Abstract

Both analytical models and casual empiricism suggest that the timing of the recessionary costs associated with inflation stabilization in chronic inflation countries may depend on the nominal anchor which is used. Under money-based stabilization, the recession occurs at the beginning of the program, while under exchange rate-based stabilization the recession occurs later in the program. This paper provides a first attempt to formally test this hypothesis using a vector-autoregression model for Uruguay. The impulse response of output to different stabilization policies is broadly consistent with the “recession-now-versus-recession-later” hypothesis. The evidence also suggests, however, that the effectiveness of a monetary anchor in reducing inflation is hindered by the high degree of dollarization of the Uruguayan economy.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 95/99.

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Length: 46
Date of creation: 01 Oct 1995
Date of revision:
Handle: RePEc:imf:imfwpa:95/99

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Cited by:
  1. Louis Kuijs & Alain Borghijs, 2004. "Exchange Rates in Central Europe," IMF Working Papers 04/2, International Monetary Fund.
  2. Sahay, Ratna & Vegh, Carlos, 1995. "Dollarization in transition economies: Evidence and policy implications," MPRA Paper 20490, University Library of Munich, Germany.
  3. Rossini Miñán, Renzo, 2001. "Aspectos de la adopción de un régimen de metas de inflación en el Perú," Revista Estudios Económicos, Banco Central de Reserva del Perú, issue 7.
  4. Francisco José Veiga, 2002. "IMF arrangements, politics and the timing of stabilizations," NIPE Working Papers 2/2002, NIPE - Universidade do Minho.
  5. Eugenio Diaz Bonilla & Hector E. Schamis, 1999. "The Political Economy of Exchange Rate Policies in Argentina," Research Department Publications 3078, Inter-American Development Bank, Research Department.
  6. Francisco José Veiga, 2003. "The Political Economy of Failed Stabilization," NIPE Working Papers 13/2003, NIPE - Universidade do Minho.
  7. Castro, Vitor & Veiga, Francisco Jose, 2004. "Political business cycles and inflation stabilization," Economics Letters, Elsevier, vol. 83(1), pages 1-6, April.
  8. Aßmann, Christian, 2008. "Assessing the Effect of Current Account and Currency Crises on Economic Growth," Economics Working Papers 2008,01, Christian-Albrechts-University of Kiel, Department of Economics.
  9. Vítor Castro, 2003. "The Impact of Conflicts of Interest on Inflation Stabilization," NIPE Working Papers 8/2003, NIPE - Universidade do Minho.
  10. Magda Kandil, 2006. "On the transmission of exchange rate fluctuations to the macroeconomy: Contrasting evidence for developing and developed countries," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 15(1), pages 101-127.
  11. Kamin, Steve B. & Rogers, John H., 2000. "Output and the real exchange rate in developing countries: an application to Mexico," Journal of Development Economics, Elsevier, vol. 61(1), pages 85-109, February.
  12. Jianhuai Shi, 2006. "Are Currency Appreciations Contractionary in China?," NBER Working Papers 12551, National Bureau of Economic Research, Inc.
  13. Magda E. Kandil & Mohsen Bahmani-Oskooee, 2007. "Exchange Rate Fluctuations and Output in Oil-Producing Countries," IMF Working Papers 07/113, International Monetary Fund.
  14. Eugenio Diaz Bonilla & Hector E. Schamis, 1999. "La economía política de las políticas de cambio en Argentina," Research Department Publications 3079, Inter-American Development Bank, Research Department.
  15. Magda E. Kandil & Ida Aghdas Mirzaie, 2003. "The Effects of Exchange Rate Fluctuationson Output and Prices," IMF Working Papers 03/200, International Monetary Fund.
  16. Steven B. Kamin & Marc Klau, 1998. "Some multi-country evidence on the effects of real exchange rates on output," International Finance Discussion Papers 611, Board of Governors of the Federal Reserve System (U.S.).

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