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Disinflations in Latin America and the Caribbean: A Free Lunch?

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  • Marc Hofstetter

Abstract

This paper challenges the conventional view according to which disinflations in LAC-even from low and moderate peaks-have been carried out at no cost to output. After suggesting a new methodology that allows for long-lived effects and inflation inertia when measuring costs of disinflations, large sacrifice ratios are obtained for the 1970s and 80s. Nevertheless, a new puzzle arises: disinflation costs in the 90s are negative, even with the new methodology. It is shown that an unusual combination of circumstances-i.e. capital inflows, structural reforms and the peculiar recent inflation history-can explain that fortunate result. Moreover, it is shown that LAC episodes exhibit a larger speed than G7 experiences. That speed differential explains why disinflation costs in developed nations are on average larger than LAC’s.

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Bibliographic Info

Paper provided by The Johns Hopkins University,Department of Economics in its series Economics Working Paper Archive with number 506.

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Date of creation: Mar 2004
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Handle: RePEc:jhu:papers:506

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  1. Laurence Ball, 1994. "What Determines the Sacrifice Ratio?," NBER Chapters, in: Monetary Policy, pages 155-193 National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Nicolás De Roux & Marc Hofstetter, 2012. "Sacrifice Ratios and Inflation Targeting: The Role of Credibility," DOCUMENTOS CEDE 009325, UNIVERSIDAD DE LOS ANDES-CEDE.
  2. Marc Hofstetter, 2007. "Disinflating From Moderate Inflation," DOCUMENTOS CEDE 002373, UNIVERSIDAD DE LOS ANDES-CEDE.
  3. Mazumder, Sandeep, 2014. "The sacrifice ratio and core inflation," Journal of Macroeconomics, Elsevier, vol. 40(C), pages 400-421.
  4. Andrés González & Franz Hamann, . "Lack of Credibility, Inflation Persistence and Disinflation in Colombia," Borradores de Economia 658, Banco de la Republica de Colombia.
  5. Mazumder, Sandeep, 2012. "Determinants of the Sacrifice Ratio: Evidence from OECD and non-OECD countries," Working Papers 106, Wake Forest University, Economics Department.
  6. Marc Hofstetter, 2006. "La política monetaria y la Corte Constitucional: el caso del salario mínimo," Revista de Economía Institucional, Universidad Externado de Colombia - Facultad de Economía, vol. 8(14), pages 105-124, January-J.
  7. Bowdler, Christopher & Nunziata, Luca, 2010. "Labor market structures and the sacrifice ratio," Journal of Macroeconomics, Elsevier, vol. 32(3), pages 816-826, September.
  8. Hofstetter, Marc, 2010. "Sticky prices and moderate inflation," Economic Modelling, Elsevier, vol. 27(2), pages 535-546, March.

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