The business cycle associated with exchange-rate-based stabilization
AbstractThis paper deals with the effects of disinflation on economic activity in"chronic inflation"countries -- countries with a long inflationary history above the rates in industrialized countries, where labor and capital markets are adjusted to function in the inflationary environment. The sample is based on a number of Latin American countries and Israel. The main finding is that stabilization processes in chronic inflation countries do not normally follow the usual Phillips curve trade off in the medium run. Specifically, stabilization progams in these countries are often associated with a business cycle, beginning with a boom and ending with a recession. This finding relates to the programs which used the exchange rate as the main nominal anchor, referred to as"exchange rate based stabilization"(ERBS). This paper documents the main features of the business cycle phenomenon in ERBSs, and tries to understand its causes and to derive some policy implications for future stabilizations. It refers to relevant features of stabilizations in industrial low-inflation economies and in hyperinflationary episodes, and then turns to chronic inflation countries. It highlights the main facts concerning the business cycles in these experiences and discusses the differences between ERBSs and disinflation programs which use money as the nominal anchor. This paper concludes with issues related to the countercyclical policies.
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Bibliographic InfoPaper provided by The World Bank in its series Policy Research Working Paper Series with number 513.
Date of creation: 31 Oct 1990
Date of revision:
Economic Theory&Research; Environmental Economics&Policies; Economic Stabilization; Macroeconomic Management; Fiscal&Monetary Policy;
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