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Why Do Many Disinflations Fail? the Importance of Luck, Timing, and Political Institutions

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  • A. Javier Hamann
  • Alessandro Prati

Abstract

Many inflation stabilizations succeed only temporarily. Using a sample of 51 episodes of stabilization from inflation levels above 40 percent, we show that most of the failures are explained by bad luck, unfavorable initial conditions, and inadequate political institutions. The evolution of trading partners' demand and U.S. interest rates captures the effect of bad luck. Past inflation affects the outcome in two different ways: a long history of high inflation makes failure more likely, while a high level of inflation prior to stabilization increases the chances of success. Countries with short-lived political institutions, a weak executive authority, and proportional electoral rules also tend to fail. After controlling for all these factors, we find that exchange-rate-based stabilizations are more likely to succeed. These findings are robust across measures of failure (two dichotomous and one continuous), sample selection criteria, and estimation techniques, including Heckman's correction for the endogeneity of the anchor.

Suggested Citation

  • A. Javier Hamann & Alessandro Prati, 2002. "Why Do Many Disinflations Fail? the Importance of Luck, Timing, and Political Institutions," IMF Working Papers 02/228, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:02/228
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    Citations

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    Cited by:

    1. Giovanni B. Pittaluga & Elena Seghezza, 2012. "The role of Rentiers in the stabilization processes of the 1920s," European Review of Economic History, Oxford University Press, vol. 16(2), pages 188-210, May.
    2. Marc Hofstetter, 2008. "Why Have So Many Disinflations Succeeded?," Contemporary Economic Policy, Western Economic Association International, vol. 26(1), pages 89-106, January.
    3. Federico Ravenna, 2005. "The European Monetary Union as a Commitment Device for New EU Member States," Working Papers 98, Oesterreichische Nationalbank (Austrian Central Bank).
    4. Guido Tabellini, 2005. "The Role of the State in Economic Development," Kyklos, Wiley Blackwell, vol. 58(2), pages 283-303, April.
    5. Alessandra Bonfiglioli & Gino Gancia, 2015. "Economic Uncertainty and Structural Reforms," Working Papers 847, Barcelona Graduate School of Economics.
    6. Alessandra Bonfiglioli and Gino Gancia, 2010. "The Political Cost of Reforms," Working Papers 507, Barcelona Graduate School of Economics.
    7. Hans Pitlik, 2008. "The Impact of Growth Performance and Political Regime Type on Economic Policy Liberalization," Kyklos, Wiley Blackwell, vol. 61(2), pages 258-278, May.
    8. Guido Merzoni & Federico Trombetta, 2016. "The cost of doing the right thing. A model of populism with rent-seeking politicians and the economic crisis," DISEIS - Quaderni del Dipartimento di Economia internazionale, delle istituzioni e dello sviluppo dis1602, Università Cattolica del Sacro Cuore, Dipartimento di Economia internazionale, delle istituzioni e dello sviluppo (DISEIS).
    9. Alberto Alesina & Silvia Ardagna & Francesco Trebbi, 2006. "Who adjusts and when? On the political economy of reforms," Harvard Institute of Economic Research Working Papers 2108, Harvard - Institute of Economic Research.
    10. Francisco José Veiga, 2003. "The Political Economy of Failed Stabilization," NIPE Working Papers 13/2003, NIPE - Universidade do Minho.
    11. Miguel Rueda, 2008. "Breaking Credibility in Monetary Policy: The Role of Politics in the Stability of the Central Banker," Research Department Publications 4585, Inter-American Development Bank, Research Department.
    12. Miguel Rueda, 2008. "Credibilidad en la política monetaria: Papel de políticas en la estabilidad del Presidente del Banco Central," Research Department Publications 4586, Inter-American Development Bank, Research Department.
    13. Witold Jakóbik, 2007. "On the Fundamental Principles of Economic Policy," Contemporary Economics, University of Finance and Management in Warsaw, vol. 1(2), June.

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