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The business cycle associated with exchange-rate-based stabilization

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  • Kiguel, Miguel
  • Liviatan, Nissan
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    Abstract

    This 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 Info

    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 513.

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    Date of creation: 31 Oct 1990
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    Handle: RePEc:wbk:wbrwps:513

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    Related research

    Keywords: Economic Theory&Research; Environmental Economics&Policies; Economic Stabilization; Macroeconomic Management; Fiscal&Monetary Policy;

    References

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    1. 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.
    2. Kiguel, Miguel A., 1989. "Inflation in Argentina : stop and go since the Austral plan," Policy Research Working Paper Series 162, The World Bank.
    3. Rodriguez, Carlos Alfredo, 1982. "The Argentine stabilization plan of December 20th," World Development, Elsevier, vol. 10(9), pages 801-811, September.
    4. J. Saul Lizondo & Peter J. Montiel, 1989. "Contractionary Devaluation in Developing Countries: An Analytical Overview," IMF Staff Papers, Palgrave Macmillan, vol. 36(1), pages 182-227, March.
    5. Obstfeld, Maurice, 1985. "The Capital Inflows Problem Revisited: A Stylized Model of Southern Cone Disinflation," Review of Economic Studies, Wiley Blackwell, vol. 52(4), pages 605-25, October.
    6. Peter M. Garber, 1981. "Transition from Inflation to Price Stability," NBER Working Papers 0728, National Bureau of Economic Research, Inc.
    7. Helpman, Elhanan & Razin, Assaf, 1987. "Exchange Rate Management: Intertemporal Tradeoffs," American Economic Review, American Economic Association, vol. 77(1), pages 107-23, March.
    8. Calvo, Guillermo A, 1987. "Balance of Payments Crises in a Cash-in-Advance Economy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 19(1), pages 19-32, February.
    9. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 311-25, August.
    10. Helpman, Elhanan & Leiderman, Leonardo, 1988. "Stabilization in high inflation countries: Analytical foundations and recent experience," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 28(1), pages 9-84, January.
    11. Kiguel, Miguel A & Liviatan, Nissan, 1988. "Inflationary Rigidities and Orthodox Stabilization Policies: Lessons from Latin America," World Bank Economic Review, World Bank Group, vol. 2(3), pages 273-98, September.
    12. Taylor, John B, 1979. "Staggered Wage Setting in a Macro Model," American Economic Review, American Economic Association, vol. 69(2), pages 108-13, May.
    13. Cukierman, A. & Liviatan, N., 1989. "Optimal Accommodation By Strong Policymakers Under Incomplete Information," Papers 13-89, Tel Aviv.
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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 A. Végh Gramont, 1991. "Stopping High Inflation: An Analytical Overview," IMF Working Papers 91/107, International Monetary Fund.
    3. Miguel Kiguel, 1994. "Exchange Rate Policy, the Real Exchange Rate, and Inflation," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 31(93), pages 229-250.

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