The Political Economy of Stopping High Inflation
First the process of high inflation is described. The theory presented is built around nine stylized facts. The high inflations have always political explanations and strong political consequences. Two traditional cures for high inflation are to apply a nominal anchor: Fix the money stock by closing the budget dificit or fix the nominal exchange rate. In both cases the braking is painful, and it often breaks down. The third traditional cure is an incomes policy, which often works in the short run, but not in the long run. By combining a hard incomes policy with a closing of the budget deficit and a fixed exchange rate, it is possible, but not easy, to stop high inflation painlessly. Finally institutional reform is discussed.
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