Sin t

1
Stabilization Policies Stylized Facts on
Hyperinflations and Chronic Inflations
Money Based Stabilization Policies MBS
Exchange Rate Stabilization Policies ERBS

• Ciclo Expansión-Recesión
• Apreciación TCR por entrada de capitales
• Deteriora CA
• Tasas Reales
• Ortodoxos (caen) Convert, Mexico, Real,
  Bolivia
• Heterodoxos () Austral, Israel, Cruzado

• Recesión (caída PBI)
• Apreciación TCR
• TB puede mejorar
• al principio
• Aumento de tasas
• Reales

2
Stopping High Inflation Carlos Vegh 1992
Evidence Using the exchange rate as the nominal
anchor, hyperinflation have been stopped almost
over night with relative minor output costs. In
contrast, exchange rate based stabilization
policies in chronic inflation countries have
typically result in a sluggish adjustment of the
inflation rate. Both cases sustained real
appreciation of the domestic currency, current
account deficits and an initial expansion in
economic activity followed by a contraction
3
ERBS
The first step assumes that a reduction in the
rate of devaluation is fully credible (Policy is
permanent). Under this circumstances inflation
falls instantaneously without any output
costs. Sticky prices dont prevent the adjustment
because price setting behavior is forward
looking. This is a way to interpret the end of
Hyper.
A second exercise assumes that the reduction in
the rate of devaluation is not credible
(temporary). Public expects the higher rate of
devaluation to resume at some point in the
future. Temporary fall in interest rate reduce
the price of present consumption, current account
deficit. The slow convergence of inflation
implies a real appreciation which finally reduce
the demand of non traded goods and recession is
coming.
Could be interpreted as a stabilization in
Chronic inflation country based on ERBS
4
Stopping Hyperinflation Stylized Facts
The post World War I Austria Germany Hung
ary Poland Russia The post World War
II Hungary Greece
ERBS Fiscal Adjustments
Aid from US
Taiwan 1945-49
ERBS Fiscal Adjustments
Bolivia 1984-1985
5
Common Facts
Inflation is stopped immediately output costs are
relative small
Stopping Chronic Inflation Stylized Facts

• Latin American heterodox programs of the 1960
• Argentina-Brazil-Uruguay
• Fixed exchange rate
• income policies (price and fares control in
  public utilities and and wages)
• all three programs achieved an initial decline in
  inflation but non sustainable along time.

6

• Southern cone stabilization programs of the late
  1970s
• Argentina-Chile-Uruguay
• Orthodox programs (no price or wage controls)
• The exchange rate policy consisted in announcing
  a devaluation schedule tablita with a
  decreasing rate
• The slow convergence of inflation and the
  corresponding real appreciation of the domestic
  currency proved fatal.All three programs ended
  in dramatic fashion with large exchange rate and
  financial crisis.

7

• Heterodox programs of the mid-1980s
• Argentina-Israel-Brazil-Mexico
• price and wage controls, income policies
  (desagio)
• Fixed exchange rate
• Inflation converges slowly
• There was a sustained real appreciation of the
  domestic currency
• Current account and trade balance deficit
• Real activity increases at the beginning of the
  program and later contracts.

8
The Model
Two goods c is a home good c is tradable
good Identical immortal household Individuals
maximize consumption path rate of preference are
equal rate of interest e EP/P The consumer is
required to use money to carry out purchases. The
cash in advance constraint is ?(c/ec)m The
consumer holds an internationally traded bond
b Real financial wealth is a mb