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Stabilization and Liberalization Policies in Central and Eastern Europe: Lessons From Latin America


  • Sebastian Edwards


This paper discusses some economic problems faced by the Eastern European nations in light of recent Latin American experiences. The paper first argues that in spite of some important cultural, political and institutional differences, there are indeed some similarities between Eastern European and Latin American economic problems. The discussion concentrates on four specific areas: (1) monetary overhang and repressed inflation; (2) fiscal imbalances and inflationary pressures; (3) deindexation and inflationary inertia; and (4) the use of the exchange rate as a nominal anchor. It is argued that in Chile the reliance on a price jump to solve the money overhang problem of 1973 created high inflationary expectations, increasing the degree of inertia of inflation. It is also pointed out that the Latin American experience tells a serious cautionary tale regarding the use of nominal exchange rate anchors. More often than not these types of policies have resulted in overvaluation, losses in international competitiveness and eventual external sector crises. A comparison of the Chilean and Mexican stabilization programs suggest that the use of exchange rate anchors will be more effective (and more credible) if the fixing of the exchange rate is accompanied by other policies geared at breaking inertia. Among these policies the most important one is the abandonment of wage rate indexation practices.

Suggested Citation

  • Sebastian Edwards, 1991. "Stabilization and Liberalization Policies in Central and Eastern Europe: Lessons From Latin America," NBER Working Papers 3816, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:3816
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    References listed on IDEAS

    1. Rudiger Dornbusch & Sebastian Edwards, 1991. "The Macroeconomics of Populism in Latin America," NBER Books, National Bureau of Economic Research, Inc, number dorn91-1, January.
    2. Fischer, Stanley, 1986. "Issues in Medium-term Macroeconomic Adjustment," World Bank Research Observer, World Bank Group, vol. 1(2), pages 163-182, July.
    3. 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.
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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. Sebastian Edwards, 1993. "The Political Economy of Infaliton and Stabilization in Developing Countries," NBER Working Papers 4319, National Bureau of Economic Research, Inc.
    3. Calvo, Guillermo A. & Vegh, Carlos A., 1999. "Inflation stabilization and bop crises in developing countries," Handbook of Macroeconomics,in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 24, pages 1531-1614 Elsevier.
    4. Calvo, Guillermo A. & Vegh, Carlos A., 1994. "Stabilization dynamics and backward-looking contracts," Journal of Development Economics, Elsevier, vol. 43(1), pages 59-84, February.
    5. de Haan, Jakob & Sturm, Jan-Egbert, 2003. "Does more democracy lead to greater economic freedom? New evidence for developing countries," European Journal of Political Economy, Elsevier, vol. 19(3), pages 547-563, September.
    6. Lundström, Susanna, 2002. "Decomposed Effects of Democracy on Economic Freedom," Working Papers in Economics 74, University of Gothenburg, Department of Economics.
    7. Onur Koska, 2005. "Financial Liberalization Era in Turkey: Critique on Decree No.32," Macroeconomics 0506016, EconWPA.
    8. Fidrmuc, Jan, 2000. "Liberalization, democracy and economic performance during transition," ZEI Working Papers B 05-2000, University of Bonn, ZEI - Center for European Integration Studies.
    9. 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.
    10. Sebastian Edwards, 1993. "Latin American Economic Integration: A New Perspective on an Old Dream," The World Economy, Wiley Blackwell, vol. 16(3), pages 317-338, May.
    11. Antonio Saravia, 2015. "Political Regime Stability and Economic Freedom," Cato Journal, Cato Journal, Cato Institute, vol. 35(3), pages 581-602, Fall.

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