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Inflation Stabilization with Incomes Policy Support: A Review of the Experience in Argentina, Brazil and Israel

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  • Rudiger Dornbusch
  • Mario Henrique Simonsen

Abstract

In 1985-86 Argentina, Brazil and Israel initiated programs of stabilization after episodes of high and sharply accelerating inflation. Among the key features of each stabilization program were the use of wage- price controls, a fixed exchange rate and fiscal correction as well as a significant expansion in the nominal quantity of money. The combination of fiscal correction and incomes policy has come to be known as "heterodox" stabilization policy, thus opposing it to the conventional IHF programs which emphasize tight monetary and fiscal policies as the exclusive instrument of stabilization. The stabilization programs in Argentina and Israel have now been in force for over a year and the more recent one in Brazil for half a year. There is accordingly enough evidence to make a first judgment on the success and the limitations of these new schemes. At the same time it is worthwhile spelling out some of the special features of stabilization and the resulting intellectual case for heterodox programs. The paper focuses on the conceptual issues related to the use of incomes policy in the context of stabilization when inertia is a central feature, The analysis includes the relation between deficits and inflation, inertial inflation and the basics of monetary reform. We also review the actual stabilization experience in Argentina, Brazil and Israel. The paper concludes with a discussion of the political dimension of stabilization, showing the extraordinary political popularity of the new programs.

Suggested Citation

  • Rudiger Dornbusch & Mario Henrique Simonsen, 1987. "Inflation Stabilization with Incomes Policy Support: A Review of the Experience in Argentina, Brazil and Israel," NBER Working Papers 2153, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:2153
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    1. Vittorio Corbo & Jaime de Melo & James Tybout, 2015. "What Went Wrong with the Recent Reforms in the Southern Cone," World Scientific Book Chapters,in: Developing Countries in the World Economy, chapter 2, pages 21-54 World Scientific Publishing Co. Pte. Ltd..
    2. Fernandez, Roque B., 1985. "The expectations management approach to stabilization in Argentina during 1976-1982," World Development, Elsevier, vol. 13(8), pages 871-892, August.
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    Cited by:

    1. Escudé, Guillermo, 1989. "Ajuste macroeconómico, deuda externa y ahorro en la Argentina," Sede de la CEPAL en Santiago (Estudios e Investigaciones) 34185, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    2. Cardoso, Eliana A & Dornbusch, Rudiger, 1987. "Brazil's Tropical Plan," American Economic Review, American Economic Association, vol. 77(2), pages 288-292, May.
    3. Kiguel, Miguel A. & Liviatan, Nissan, 1989. "The old and the new in heterodox stabilization programs : lessons from the 1960s and the 1980s," Policy Research Working Paper Series 323, The World Bank.
    4. van Wijnbergen, Sweder, 1991. "Should price reform proceed gradually or in a"big bang?"," Policy Research Working Paper Series 702, The World Bank.
    5. Helpman, Elhanan & Leiderman, Leonardo, 1990. "Real wages, monetary accommodation, and inflation," European Economic Review, Elsevier, vol. 34(5), pages 897-911, July.
    6. Bruno Chiarini, 1996. "Disinflation in the Italian economy in an optimal control setting," Open Economies Review, Springer, vol. 7(4), pages 391-422, October.
    7. Solimano, Andres, 1989. "Inflation and the costs of stabilization : country experiences, conceptual issues, and policy lessons," Policy Research Working Paper Series 226, The World Bank.
    8. Chris Canavan & Mariano Tommasi, 1997. "Visibility and Credibility in the Political Economy of Reform," Boston College Working Papers in Economics 346., Boston College Department of Economics.
    9. Kiguel, Miguel A. & Liviatan, Nissan, 1991. "Lessons from the heterodox stabilization programs," Policy Research Working Paper Series 671, The World Bank.
    10. Carlos Végh, 2002. "Monetary Policy, Interest Rate Rules, and Inflation Targeting: Some Basic Equivalences," Central Banking, Analysis, and Economic Policies Book Series,in: Fernando Lefort & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Serie (ed.), Indexation, Inflation and Monetary Policy, edition 1, volume 2, chapter 6, pages 151-182 Central Bank of Chile.
    11. Marongiu, Federico, 2007. "Alta inflación y planes de ajuste en Brasil durante el retorno a la democracia - 1985-1994
      [High inflation and adjustment in Brazil during the return to democracy - 1985-1994]
      ," MPRA Paper 18956, University Library of Munich, Germany.
    12. Miguel A. Kiguel, 1999. "The Argentine Currency Board," CEMA Working Papers: Serie Documentos de Trabajo. 152, Universidad del CEMA.
    13. Kiguel, Miguel & Liviatan, Nissan, 1990. "The inflation - stabilization cycles in Argentina and Brazil," Policy Research Working Paper Series 443, The World Bank.

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