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Disinflation and the Recession-Now-Versus-Recession-Later Hypothesis; Evidence From Uruguay

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  • Carlos A. Végh Gramont
  • Willy W. Hoffmaister

Abstract

Both analytical models and casual empiricism suggest that the timing of the recessionary costs associated with inflation stabilization in chronic inflation countries may depend on the nominal anchor which is used. Under money-based stabilization, the recession occurs at the beginning of the program, while under exchange rate-based stabilization the recession occurs later in the program. This paper provides a first attempt to formally test this hypothesis using a vector-autoregression model for Uruguay. The impulse response of output to different stabilization policies is broadly consistent with the “recession-now-versus-recession-later” hypothesis. The evidence also suggests, however, that the effectiveness of a monetary anchor in reducing inflation is hindered by the high degree of dollarization of the Uruguayan economy.

Suggested Citation

  • Carlos A. Végh Gramont & Willy W. Hoffmaister, 1995. "Disinflation and the Recession-Now-Versus-Recession-Later Hypothesis; Evidence From Uruguay," IMF Working Papers 95/99, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:95/99
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    References listed on IDEAS

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    1. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-1054, July.
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    3. Reinhart, Carmen M. & Vegh, Carlos A., 1995. "Nominal interest rates, consumption booms, and lack of credibility: A quantitative examination," Journal of Development Economics, Elsevier, vol. 46(2), pages 357-378, April.
    4. Sergio Rebelo & Carlos A. Vegh, 1995. "Real Effects of Exchange-Rate-Based Stabilization: An Analysis of Competing Theories," NBER Chapters,in: NBER Macroeconomics Annual 1995, Volume 10, pages 125-188 National Bureau of Economic Research, Inc.
    5. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
    6. Carmen M. Reinhart & Vincent R. Reinhart, 1991. "Output Fluctuations and Monetary Shocks: Evidence from Colombia," IMF Staff Papers, Palgrave Macmillan, vol. 38(4), pages 705-735, December.
    7. Rodriguez, Carlos Alfredo, 1982. "The Argentine stabilization plan of December 20th," World Development, Elsevier, vol. 10(9), pages 801-811, September.
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    More about this item

    Keywords

    Economic stabilization; Uruguay; exchange rate; inflation; money growth; real exchange rate; exchange rate depreciation;

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables

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