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

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Marc Hofstetter

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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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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. Mishkin, Frederic S. & Savastano, Miguel A., 2001. "Monetary policy strategies for Latin America," Policy Research Working Paper Series 2685, The World Bank. [Downloadable!]
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  2. Eduardo Lora, 2001. "Structural reforms in Latin America: What has been reformed and how to measure it?," RES Working Papers 4287, Inter-American Development Bank, Research Department. [Downloadable!]
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  3. Dornbusch, Rudiger & Fischer, Stanley, 1993. "Moderate Inflation," World Bank Economic Review, Oxford University Press, vol. 7(1), pages 1-44, January.
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  4. Fischer, Stanley, 1988. "Real Balances, the Exchange Rate, and Indexation: Real Variables in Disinflation," The Quarterly Journal of Economics, MIT Press, vol. 103(1), pages 27-49, February. [Downloadable!] (restricted)
  5. Guillermo A. Calvo & Carlos A. Végh, 1994. "Inflation Stabilization And Nominal Anchors," Contemporary Economic Policy, Western Economic Association International, vol. 12(2), pages 35-45, 04. [Downloadable!] (restricted)
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  6. N. Gregory Mankiw & Ricardo Reis, 2001. "Sticky Information Versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," NBER Working Papers 8290, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Stanley Fischer, 1988. "Real Balances, the Exchange Rate and Indexation: Real Variables in Disinflation," NBER Working Papers 1497, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. Carmen M. Reinhart & Kenneth S. Rogoff, 2002. "The Modern History of Exchange Rate Arrangements: A Reinterpretation," NBER Working Papers 8963, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February. [Downloadable!] (restricted)
  10. John B. Taylor, 1984. "Union Wage Settlements During a Disinflation," NBER Working Papers 0985, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. Laurence Ball, 1994. "What Determines the Sacrifice Ratio?," NBER Chapters, in: Monetary Policy, pages 155-193 National Bureau of Economic Research, Inc. [Downloadable!]
  12. Marc Hofstetter, 2005. "Why Have So Many Disinflations Succeeded?," DOCUMENTOS CEDE 003777, UNIVERSIDAD DE LOS ANDES-CEDE. [Downloadable!]
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  13. José De Gregorio & Pablo E. Guidotti & Carlos A. Végh, 1998. "Inflation Stabilization and the Consumption of Durable Goods," Documentos de Trabajo 26, Centro de Economía Aplicada, Universidad de Chile. [Downloadable!]
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  14. Boschen, John F. & Weise, Charles L., 2001. "The Ex Ante Credibility of Disinflation Policy and the Cost of Reducing Inflation," Journal of Macroeconomics, Elsevier, vol. 23(3), pages 323-347, July. [Downloadable!] (restricted)
  15. Eduardo Lora & Ugo Panizza, 2002. "Structural Reforms in Latin America under Scrutiny," RES Working Papers 4303, Inter-American Development Bank, Research Department. [Downloadable!]
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  16. Guillermo Calvo & Carmen Reinhart & Leonardo Leiderman, 1992. "Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors," IMF Working Papers 92/62, International Monetary Fund.
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  17. Romer, David, 1993. "Openness and Inflation: Theory and Evidence," The Quarterly Journal of Economics, MIT Press, vol. 108(4), pages 869-903, November. [Downloadable!] (restricted)
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  18. N. Gregory Mankiw, 1994. "Monetary Policy," NBER Books, National Bureau of Economic Research, Inc, number greg94-1, Summer.
  19. Michael Bruno & William Easterly, 1995. "Inflation Crises and Long-Run Growth," NBER Working Papers 5209, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  20. Laurence Ball & N. Gregory Mankiw & David Romer, 1988. "The New Keynsesian Economics and the Output-Inflation Trade-off," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1988-1), pages 1-82. [Downloadable!]
  21. Temple, Jonathan, 2002. "Openness, Inflation, and the Phillips Curve: A Puzzle," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(2), pages 450-68, May.
  22. Lawrence Huiyan Zhang, 2001. "Sacrifice Ratios with Long-Lived Effects," Economics Working Paper Archive 446, The Johns Hopkins University,Department of Economics. [Downloadable!]
  23. Laurence M. Ball, 1999. "Policy Rules for Open Economies," NBER Chapters, in: Monetary Policy Rules, pages 127-156 National Bureau of Economic Research, Inc. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Marc Hofstetter, 2008. "Sticky Prices and Moderate Inflation," DOCUMENTOS CEDE 005856, UNIVERSIDAD DE LOS ANDES-CEDE. [Downloadable!]
  2. 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. [Downloadable!]
  3. Marc Hofstetter, 2007. "Disinflating From Moderate Inflation," DOCUMENTOS CEDE 002373, UNIVERSIDAD DE LOS ANDES-CEDE. [Downloadable!]
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