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Stabilization and Liberalization Policies in Central and Eastern Europe: Lessons From Latin America

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  • Sebastian Edwards

Abstract

This paper discusses some economic problems faced by the Eastern European nations in light of recent Latin American experiences. The paper first argues that in spite of some important cultural, political and institutional differences, there are indeed some similarities between Eastern European and Latin American economic problems. The discussion concentrates on four specific areas: (1) monetary overhang and repressed inflation; (2) fiscal imbalances and inflationary pressures; (3) deindexation and inflationary inertia; and (4) the use of the exchange rate as a nominal anchor. It is argued that in Chile the reliance on a price jump to solve the money overhang problem of 1973 created high inflationary expectations, increasing the degree of inertia of inflation. It is also pointed out that the Latin American experience tells a serious cautionary tale regarding the use of nominal exchange rate anchors. More often than not these types of policies have resulted in overvaluation, losses in international competitiveness and eventual external sector crises. A comparison of the Chilean and Mexican stabilization programs suggest that the use of exchange rate anchors will be more effective (and more credible) if the fixing of the exchange rate is accompanied by other policies geared at breaking inertia. Among these policies the most important one is the abandonment of wage rate indexation practices.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3816.

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Date of creation: Aug 1991
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Handle: RePEc:nbr:nberwo:3816

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  1. Dornbusch, Rudiger & Edwards, Sebastian, 1989. "The macroeconomics of populism in Latin America," Policy Research Working Paper Series 316, The World Bank.
  2. Fischer, Stanley, 1986. "Issues in Medium-term Macroeconomic Adjustment," World Bank Research Observer, World Bank Group, vol. 1(2), pages 163-82, July.
  3. Guillermo Calvo & Carlos A. Végh Gramont, 1990. "Credibility and the Dynamics of Stabilization Policy: A Basic Framework," IMF Working Papers 90/110, International Monetary Fund.
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Cited by:
  1. Schweickert, Rainer & Nunnenkamp, Peter & Hiemenz, Ulrich, 1992. "Stabilisierung durch feste Wechselkurse: Fehlschlag in Entwicklungsländern - Erfolgsrezept für Osteuropa?," Kiel Discussion Papers 181, Kiel Institute for the World Economy (IfW).
  2. Carlos Végh, 1998. "Monetary Policy, Interest Rate Rules, and Inflation Targeting: Some Basic Equivalences," Working Papers Central Bank of Chile 32, Central Bank of Chile.
  3. Guillermo A. Calvo & Carlos A. Vegh, 1999. "Inflation Stabilization and BOP Crises in Developing Countries," NBER Working Papers 6925, National Bureau of Economic Research, Inc.
  4. Hiemenz, Ulrich & Funke, Norbert, 1993. "The experience of developing countries with macroeconomic stabilisation and structural adjustment," Kiel Working Papers 606, Kiel Institute for the World Economy.
  5. de Haan, Jakob & Sturm, Jan-Egbert, 2003. "Does more democracy lead to greater economic freedom? New evidence for developing countries," European Journal of Political Economy, Elsevier, vol. 19(3), pages 547-563, September.
  6. Funke, Norbert, 1993. "Timing and sequencing of reforms: Competing views," Kiel Working Papers 552, Kiel Institute for the World Economy.
  7. Onur Koska, 2005. "Financial Liberalization Era in Turkey: Critique on Decree No.32," Macroeconomics 0506016, EconWPA.

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