Munich Personal RePEc Archive
Inflation stabilization in chronic inflation countries: The empirical evidence
Reinhart, Carmen and Vegh, Carlos
University of Maryland, College Park, Department of Economics
August 1994
Online at https://mpra.ub.uni-muenchen.de/13689/
MPRA Paper No. 13689, posted 02 Mar 2009 05:53 UTC
JORNADAS INTERNACIONALES DE ECONOMIA
trprogram as de estabiljzaci6n:
La experiencia reciente I';;flAm enea Latina f t
BANCO CENTRAL DEL URUGUAY Hontevideo, 8 Y 9 de agosto de 1994
ESTABILIZACION EN PAISES DE INFLACION CRONICA:
La Evidencia Empirica
CARMEN REINI~T (Departamento de Investigaciones, FMI) CARLOS VEGH (Departamento de Investigaciones, FMI)
- T
Outline
For discussion at the conference only July 31, 1994
Inflation Stabilization in Chror:ic Inflation .countries:
The Empirical Evidence
11
by
Carmen M. Reinhart and Carlos A. Vegh Research Department, IMF
I. Introduction
Chronic inflation is characterized by long periods (i.e., several
decades) of high (relative to industrial countries) and persistent ,·inflation (Pazos, 1972). The phenomenon of chronic inflation emerged in several Latin American countries after World War II, and has been a distinguishing feature of the economic landscape of several countries ever since. After numerous failed attempts, some countries have succeeded to reduce inflation close to international levels (Argentina, Chile, Israel, and Mexico).
There is a rich history of stabilizatj~ons in chronic inflation countries, which spans more than three decades. This provides a unique opportunity to identify the main patterns of adjustment and examine
11
This outline has been prepared to be discussed at the conference on"Inflation Stabilization: The Recent Experience in Latin America," organized by the Central Bank of Uruguay, to be held on August 8-9, 1994. The views expressed her~ are those of the authors arid do not necessarily represent those of the IMF.
r
- 2 -
econometrically some of the main features of disinflation in chronic
inflation countries. Our study is based on 17 stabilization plans from 1964 to the present in 7 countries: Argentina, Brazil, the Dominican Republic, Israel, Mexico, Peru, and Uruguay (see Table 1). Twelve of these programs were based on the use of the exchange rat,~ as the nominal anchor, while 5 were based on the use of a monetary aggregate.
In addition to reviewing the main "stylized facts" for these 17 stabilization plans (in the spirit of Kigne1 and Liviatan (1992), Vegh
(1992), and Calvo and Vegh (1994)), we resort to different econometric exercises and thus are able to provide sm~e rigorous econometric basis for several key features of disinflation in cllronic inflation countries.
II. Empirical regularities
This section reviews the main empirieal regularities of exchange rate- based and money-based programs. These are:
1. Inflation converge only slowly to the rate of growth of the nominal anchor (Chart 1).
2. The real exchange rate appreciates in both exchange rate-based and money-based programs (Chart 2).
3. In exchange rate-based programs, there is an initial boom in economic activity (real GDP and consumption) followed by a later
contraction. In money-based programs, the recession occurs at the beginning of the programs (Table 2).
4. The external accounts (trade and current account) worsen in exchange rate-based stabilizations.
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5. The capital account improves sub!;tantially in exchange rate-based stabilizations (although external factors seem to play an important role), see Table 3. A similar story applies to stock markets (Chart 4). The boom in asset markets is not limited to the equity market, but is also evident in real estate prices, which tend to rise throughout the program.
6. International reserves appear to increase substantially in both exchange rate-based and money-based stabilization, with the resulting accumulation being more pronounced in periods of heavy capital inflows
(Chart 3 and Table 3). The accumulation of reserves in money-based programs suggests considerably intervention in foreign exchange rate markets, which may reflect an unwillingness to let the real exchange rate appreciate.
7. Real interest rates have increased in the initial stages of money based-stabilization. In exchange rate-based stabilizations, real interest rates have generally fallen in orthodox pl~ograms (although in Chile they remained at very high levels) and increased in heterodox programs (Table 4).
8. The fiscal stance varies considel~ably across programs. In successful programs, there is a substantial fiscal tightening. In other cases, however, the fiscal outcome may simply reflect the pick-up in
economic activity and the resulting increase in tax revenues (Table 5), as emphasized by Talvi (1994).
III. Inflation Stabilization and Economic Growth
Both theory and casual evidence suggest that exchange rate-based
---_._-_..-_.-•.._.~~---
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stabilization programs have been characterized by a boom-bust pattern in economic activity, particularly private consumption. Money-based plans are associated with and initial recession followed by recovery in economic activity. The evolution of real GDP growth and consumption growth shown in Table 2 highlights the marked differences in the so-called "inflation- output" tradeoff between the two types of plans. The more systematic econometric treatment discussed below also lends support to the "recession now versus recession later hypothesis".
A panel of seven countries which have collectively implemented
seventeen inflation stabilization plans o,rer the last thirty years was used to test if mean rates of growth in real GDP are statistically different during inflation stabilization plans. The sample is 1964-1993 and the countries are: Argentina, Brazil, Chile, Dominican Republic, Mexico, Peru, and Uruguay. The results are robust to variations in the estimation
technique; the fixed-effects estimates are presented in Table 6.
The main results are:
1. The mean rate of growth increases in the early stages of an exchange rate-based plan: the estimated irLcrease is about 2.3 percent and statistically significant.
2. During the last year of the program, a recession ensues. Note that these estimates do not imply an output decline of 5.4 percent, but a decline of 1. 8 percent (5.4 below the mean growth rate of 3.6). The
difference in growth in the final year of the program is also statistically significant.
- 5 -
3. The mean rate of real GDP growth falls by about 5.4 percent in the early phases of money-based programs. There is also evidence of a later rebound in economic activity, but (unlike the early recession) this
difference is not significant.
4. The cumulative effect on output of an exchange rate-based stabilization plan varies considerably as the duration of the plan varies.
As Table 7 illustrates, given the magnitude of the late recession, the level of output ends up being lower for plans lasting three years or less. Short- lived plans are costly.
5. More generally, the evidence suggests that output is not invariant to th~ policy regime, as suggested by some of the recent endogenous growth literature.
IV. How effective are the nominal anchors?
The speed and magnitude of the decline in inflation depends crucially on a multitude of institutional factors as well as on macroeconomic and microeconomic policies. The analysis that follows does not attempt to trace out the various transmission mechanisms through which the nominal anchor (the exchange rate or money) affect prices. Rather, the emphasis is on examining the "reduced-form" dynamic interaction between these two variables during selected stabilization plans. The goal is to assess how quickly a policy shock is transmitted to. inflation, and thus make statements about the presence or absence of inflation inertia and the effectiveness of policy.
A total of 11 plans are examined (nine exchange-rate based and two money-based) .. A bivariate vector autoregi:ession (VAR) using monthly
- 6 -
inflation rates and devaluation rates is estimated for the exchange rate- based plans; money growth (Ml) and inflation define the system for the
money-based plans. The period of estimation covers only the duration of the plan, hence it is free from the parameter inconstancy that is at the heart of the Lucas critique. We evaluate, the effectiveness of policy at two
levels.
First, we determine if there is a systematic and significant causal relationship between the nominal anchor and the target variable, inflation.
Significant causality is necessary but not sufficient for policy to be effective, since the impact may be significant but quantitatively small.
"For instance, one would expect the pass-through from exchange rates to prices to depend on the openness of the economy, the degree of indexation,
the extent of credibility, and so on. Secondly, to assess the issue of quantitative importance as well as speed of adjustment we examine the impact on inflation of a hypothetical tempo.rary s:hock to the nominal anchor.
The main results can be summarized as foll,ows:
1. In eight out of the nine exchange rate-based programs there is a significant causality from the rate of devaluation to the rate inflation
(Table 8). The exception is the Argentine 1967 plan, where the fixity of the rate resulted in serious collinearity problems. The recent
Convertibility plan also shows some of the same problems. As one would expect with an exogenous policy instrument, the exchange rate is not
affected by past (or current) inflation with the exception of Israel. Money also appears exogenous during the money-based plans considered. However, significant causality from money growth to inflation was detected in the
- 7 -
Chilean 1975 plan. Thus, causal patterns appear to be constant across countries and across time.
2. In six of the nine episodes examined, past inflation
significantly affected current inflation, indicating systematic inflation inertia. The inertial behavior was most pronounced in Chile, Mexico, and Israel.
3. Charts 5-8 plot the response of monthly inflation to a
reduction in the rate of devaluation (or money growth) at an annual rate of 20 percent lasting 12 months. Note that:
a) The smallest impact on inflal:ion is seen in the plans of the 1960s, where inflation falls by 13.6 perceIlt for Argentina and only 10 percent for Uruguay (this is the lowest response in our sample). It may possibly be reflecting the relatively closed nature of the economy at that
time.
b) The maximum effectiveness is reached in the Tablita plans, where the decline in inflation ranges from 113.5 percent for Argentina to 22 percent for Uruguay, with Chile in the middle. Further, the decline in inflation for the cases of Argentina and Uruguay is fairly sudden. These two observations possibly suggest that the m)sence of more significant
declines in inflation in these programs may l:lavehad more to do with "policy inertia" rather than with "inflation inertia". The inflation inertia
argument appears to find more support in the Chilean data, as it takes a year for inflation to decline to its minimum level.
c) The exchange rate pass-through appears to decline in the 1980s and 1990s. For the four exchange rate-based programs, the maximum decline
---
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in inflation in response to a twenty percent reduction in the rate of devaluation ranges from 11 percent for Mexico to 15 percent for the Argentine Convertibility plan. This result remains puzzling. Perhaps
greater indexation and/or lower credibility may account for this change.
The time (in months) it takes to reach the minimum ranges from 3 months for Uruguay to 14 months for Israel.
d) With regard to the money-based plans, the response to the shock for both Chile and the Dominican Republic is gradual, taking 12-15 months to reach its most pronounced effect~ The inertia is also evident in the Chilean
1975
money-based plan, where It takes a year for inflation to decline by about 14 percent. Possibly, the more delayed effects may reflect the inherent difficulties in monetary con1:rol.e) Based on three indicators of inertia (the significance of past inflation, the response to a temporary policy shock, and the speed of
adjustment) for the more recent peri?d, I~:rael and Mexico and, to a lesser degree Chile, stand out as the countries in which inflation inertia has been most pervasive. On the other hand, in Argentina, the Dominican Republic and to a lesser extent, Uruguay, inflation inertia does not appear to be that much of a problem. The results also highlight that the interaction between
instrument and target, not only vary across countries (which is obvious), but can change markedly across time.
Table 1. Major Inflation Stabilization Plans
Plan Pori 0d
Exchange Rate-Based Stabilization Plans
Orthodox plans
Argentine tablita Chilean tablita Uruguayan tablita
Convertibility Plan (Argentina) Uruguay 1991
1978:12 - 1981:2 1978:2 - 1982:6 1978: 10 - 1982: 10 1991:4 - present 1991: 1 - present
Heterodox plans
Argentina 1967 Austral (Argentina) Brazil 1964
Cruzado (Brazil) Israel 1 9 8 51 1 .
Mexico 19871/
Uruguay 1968
1967:3 - 1970:10 1985:6 - 1986:9 1964:3 - 1968:8 1986:2 1986: 11 1985:7 - 1990:6 1987: 12 - 1992:2 1968:6 -1971:12
Money-Based Stabilization Plans
BONEX (Argentina) Collor (Brazil) Chile 1975
Dominican Republic Peru
1989:12 - 1991:1 1990:3 -1991:1 1975:4 - 1977: 12 1990:8 - present 1990:8 - present
1 /T h e s e a r e s u c c e s s fu l p r o g r a m s , h e n c e th e te r m In a l d a te h a s b e e n a r b itr a r ily s e t to fiv e y e a r s .
Table 2. Inflation Stabilization:
Real GDP
( •.nou- .•.l rAt. of growth, in peroent)
Proc; r.a.Dl
thr ••
yeAr. Year
belor. Firat. Second Third proqr •.•
ergST"" Iter Year refT ended
Exchange Rate-Based Plans Argentina 1967
Argen tine Tablita Argen tina (Austral) Arg en tin e Coo vertib ility Brazil 1964
Brazil (Cruzado) O1ilean Tablita Israel 1985 MeXico 1987 Uruguay 1968 Uruguayan Tablita Uruguay 1991 Average
6.5 -4.0
-0.4
-2.7
Money-based Plans Argentina (Bono:) Brazil (Collor) O1ile 1975
Dominican Rep.1blic 1990 Peru 1990
Average
-1.8
24
-1.9
4.6
-3.9 -0.1 3.3 0.2 20 1.1 0.2 3.5
0.7
0.9-4.40.1 -12.9
-5.4
-4.4 -5.4 0.8 7.1 7.3 8.9 267.6 8.2
4.01.2
1.16.2
0.0 4.88.7
23.1 8.3 3.6 3.3 6.3 6.05.3
7.1 3.3 0.74.9 26 -5.7 26
Growth and Consumption Cycles
Real Private Consumption
CAnna •. l rat. of qro'ttth, in percent)
'1'hr ••
Progra.JIl,
,. ••. ra r ••r
before Fir.t Second Third proqra.m
pro9£tm YeAr rear year ended
Exchange Rate- Based Plans Argen tina 1967
Argentine TabIita Argentina (Austral) Argentine Coovertibility Brazil 1964
Brazil (Cruzado) O1ilean Tablita Israel 1985 Mexico 1987 Uruguay 1968 Uruguayan Tablita Uruguay 1991 Average
6.8 -4.2
1.2
-2.1 3.6 28 1.0 0.6 0.3 0.5 0.2 -5.3
0.5
3.5 -0.9
26
1.7
5.0
3.5 10.8 3.6 7.8 -14.1 6.1 1.3 4.4 26 4.8 -1.0 20 -9.6
5.0
4.6 -1.2
7.7 -2.8 25
Money-based Plans
0.9 9.9
Argentina (Bono:) Brazil (Collor) O1ile 1975
Dominican Rep.1blic 1990 Peru 1990
Average
-1.2 -0.5 -6.3 -0.3 1.5 5.4 -1.4
Hot •• J Dot_ lndi.c~ t. the dAtA Are not .,..i.l.bl •• D•• h •• J.ndJ.oA t. d.t. do not . p p 1 r .
r11••• Are .u cce •• fu l p r o g r A II., h '.n ee the eer1 !in .l d,.t.
b,..
b •• n .rb itr.ri.ly •• t to fi,... y •• r •.O n . r ••r b . f o r • •
loure • ., Buf",a" and z,.J.d.r",a" 0 " ) 1 , F av.ro and s.".J.on 0 " ) 1 , /U gu.l and z,J..,J.otan {l"'I,
z,u.tJ.g 0 " 2 1 , x.d.lro. 1 1 " ) /, ral.,J., { l" 4 1 , V lano ( 1 " 0 1 , Int.rnatJ.onal F lnanoJ.al ItatJ..tJ.ca IIX F I, w orld S.'nJc t.bl •• , F und~ci.on H .dit.zr~n ••. , nA tio'n.l .ourc •• , .nd F und .e.ff •• e1".tt •••
26
14.4 7.9 15.7 3.3 6.4 7.5 14.8 1.8
8.2
9 -1.5
7.5
-1.8 -2.5 -11.4 -12.9 -15.3 -8.8
10.1 0.7 6.5 9 6.3 6.4
5 10.4 6.4
0.3
7.5
10.8
6.2 4.0 5.6
6.4 4.4
-3.6 0.7 4.0
4.3 10.2 -0.9 6.8 -12.1
4.3 0
5.7 4.9 24 -9.7
13 5.9 -0.5
3.9 16 -1.1
10.0
:pro9r~l'll
T a b l e 3 . T h e E x t e r n a l A c c o u n t s
Current account balance excluding offk:ial transfers
T h r c o
yeAr. Year
b e f o r e r i r . t S e o o n d T h i r d p r o 9 r a . m
p r o q r a m Y . a . r r . " r r . " r e n d e d
Exchange Rate- Based Plans Argentina 1967
Argentine Tablita Argentina (Austral) Argentine Convertibility Brazil 1964
Brazil (Cruzado) Chilean Tablita Israe11985 Mexico 1987 Uruguay 1968 Uruguayan Tablita Uruguay 1991 Average
1.4
0.5 -2.1
-1.4
-1.2 -2.3 -2.7
-3.3
0.7 1.7 -3.7 0.5 -1.3Money- based Plans Argentina (Bonex) Brazil (Coilor) Chile 1975
Dominican Republic 1990 Peru 1990
Average
-2.4
-0.3 -1.8 -5.9
-4.1
-2.9
1.0
-0.4
-2.7 -1.5 0.1 -2.1
-7.1 4.7
-2.2 1.4-5.2
0.7
-2.1
1.3 -0.7 -5.8 -3.7 -4.3 -2.6
-0.3 -2.3 -3.7
0.4
-5.7 5.5 -2.9
0.9
-7.5 -1.8-3.3
1.5
-3.3 -5.1 -2.3
-1.2
-3.3
-0.1
-7.1 -2.5 -3.2 -2.7 -4.5 1.1 -3.2
-2.6 -5.2 -3.9
-0.7 -2.8 -3.9 -0.8 -0.5 -9.5
-7.0 -2.8 -5.2 -4.7
-0.3 -4.1
-2.2
Capital balance including errors and omissions
(a.. a peroent of aOP)
proqra.JIl
T h r o .
y e a r . ~ear
b e f o r e T i r . t S . c o n d T h i r d p r o q r a J l
p r o g r a . m Y . a r Y e a r Y e a r e n d e d
Exchange Rate- Based Plans Argentina 1967
Argentine Tablita Argentina (Austral) Argentine Convertibility Brazil 1964
Brazil (Cruzado) Chilean Tablita Israel 1985 Mexico 1987 Uruguay 1968 Uruguayan Tablita Uruguay 1991 Average
-1.0 -2.9 -6.0
-0.1
1.0 -0.7
3.1
-3.5
-1.3
Money- based Plans Argentina (Bonex) Brazil (Coli or) Chile 1975
Dominican Republic 1990 Peru 1990
Average
-2.3 -2.8
-1.3
-0.0
-5.4
-2.3
Hot •• ' Dot. iDdloAt. tb. dAtA ~ r. n o t AVA1JAbJ •• D •• h •• indicAt. d.tA do not Apply.
l/~ h •• e Are .uoo ••• lul progrA~.J h.noe th. t.r.ln.J d.te b •• been .rbitrArily .et to lip. y •• r •.
$ourc •• , tnt~rnAtion.l FinAnoi.l 6tAti.tlo., And world Econnomic outlookJ tHF.
4.6 -1.6 -2.8
-6.4 22.4 -3.4 12.0 -2.8
2.4
-1.8 -2.0 -1.0 -13.6 -4.2 -4.5
-4.4
21.2
11.8 -7.2
4.3
3.8 13.0
7.0
7.9
10.2
3.4
- 3.0 2.6 -0.2
-6.8 -3.2 14.6
24.0
-6.0 7.0
5.4 15.2 18.4
7.4
3.6
-8.0
1.1
-1.6 12.0
5.2
Table 4. Real Interest Rates i.l Selected Stabilization Programs.
Real interest rates b (in percent per year) Four
Quarters First Last
before Four Four
Program Quarters Quarters
Programs Period a ~verage) (average) (average)
Exchange Rate- Based
Argentina 1967 1967-1970
Brazil 1964 1964-1968
Uruguay 1968 1969-1971
Argentine tablita 1979-1981 0.7 -2.8 5.9
Chilean tablita 1978-1982 70.9 43.0 46.4
Uruguayan tablita 1979-1982 18.2 -7.2 24.9
Austral (Argentina) C 1986 20.0 48.0 -7.5
Cruzado (Brazil) C 1986 -4.5 8.5 -9.5
Israel 1985d e 1986-1990 -2.0 21.2 11.0
Mexico 1987d 1988-1992 -2.9 292 2.0
Convertibility (Arg.) f 1991-1992 38.1 -2.0 4.0
Money-based
Chile 19759 1975-1977 127.2 58.0
Bonex (Argentina) 1990 -7.4 112.7
Collar (Brazil) h 1990 -8.1 -2.4
Dominican Rep. 1990f i 1990-1992 15.1 13.7
Peru 1990f 1990-1992 --17.3 235.0 48.1
.• C alendaryears during w hich the program w as taken to be in effect for the purpO ses
ofcurrentaccountfigure~ .
b Q uarterly real lending rates unless otherw ise indicated. Periods specified in
Tables 1and 4apply. D ots indicate data are not available. D ashes indicate data do not apply.
C Real interest rates are reported for tw o-quarter periods, and exclude theinitial price shock.
d D uration ofprogram has been arbitrarily set to five years ..
•• Real interest rate before the program refers to tw o quarters before.
f Program in progress.
g Annualreal interest rates.
/, M onthly averages of overnight interest rates on governm ent securities. Real interest rate after the program refers to first three quarters.
i Real interest rates for 1991.3and 1991.4. Before January 1991,interest rates w ere subje< :t to controls.
Sources: Bali no (1991), Barkai (1990), Bufm an and Leider.nan (1993), C astro and Rond (1991), C ukierm an (1988), K iguel and Liviatan (1989), Perez-C am paneroand Leone (1991), International Enand:d Statistics (IM F), and national sources.
Table 5. Public Sector Balance in Se!ec,ed Stabilization Program$ 1/
(as percentofGCP) Three Yean before
Program Fint Second Third Fourth Fifth
Program$ Period 11 (average) Year Year Year Year Year
Exchange Rate-Ba$ed
Argentina 1967 1967-70 -4.1 -2.0 -2.0 -1.5 -1.6 -4.1
Brazil 196431 1964-68 -4.0 -3.2 -1.6 -1.1 -1.7 -1.2
Uruguay 1968 1%9-71 -1.8 -2.5 -1.3 -5.8 -2.6
Argentine tablita 1979-81 -5.9 -4.7 -6.1 -8.5 -5.3
Chilean tabIita 1978-81 0.8 1.5 4.8 5.4 0.3 -4.0
Uruguayan tablita 1979-82 -1.4 (1.0 -0.3 -1.5 -9.1 -3.9
Austral (Argentina) 1986 -7.1 -2.0 -4.3
Cruzado (Bram) 1986 -3.9 -3.6 -5.5
Israel 19854/ 1986-90 -4.9 ~.3 0.0 -0.3 -4.0 -2.7
Mexican 198741 51 1988-92 -0.3 -4.5 -1.7 2.6 2.3 3.3
<Anvertibility (Arg.) 61 1991-93 -6.0 -0.9 0.6
Uruguay 1991 1991-93 -4.8 -0.9 -0.0 -1.6
Money-based
Chile 1975 1975-77 -20.1 -2.0 3.9 0.4 1.5
Bonex (Argen tina) 1990 -9.3 -2.3 -1.2
<Allor (Brazil) 51 1990 -5.8 1.4 1.5
Dominiean Rep. 199061 1991-92 -5.9 (1.1 1.6
Peru 19906/ 1991-92 -7.5 -2.6
S o u c e s : B u tm a n a n d L e ld e rm a n (1993), C o rb o a n d S o Ilm a n a (1,~1), 0 1 T e lla a n d D o m b u s c h (1989), K lg u e la n d L M a ta n (1 9 8 9 ). L e m g rw e r(1 9 7 7 ). M e d e Iro s (1993), R W lO S (1986), Wana (1 9 9 0 ),
n a tio n a l s o u rc e s , a n d F w d s ta ff e s tim a le s .
1 / O V e ra ll b a la n c e o f th e n o n -fin a n c Ia l p u b lIc s e c to r, u r"le s s o th u v J s e In d Ic a te d . A m In u s s Ig n In d ic a te s a d e fic it.
21 C a le n d a r y e a rs d u J in g v .h lc h p ro g ra m w a s In e ffe d . If a p ro g m m s ta rte d e a rty In th e y e a r. th a t y e a r Is a ls o In d u d e d . R g u re s re p o rte d u p to o n e y e a r a fte r th e p ro g ra m e n d e d . D o ts In d ic a te d a ta a re n o t a v a H a b le .
3 / F e d e ra l g o v e m m e ri .
.4/ D u ra tio n o f th e p ro g ra m h a s b e e n a rb ltra rftiy s e t to fiv e y e a rs .
Table 8. Causality and Exchanpe Rate Regimes
Plan and Sample Period
Inflation EqualJon F-statistic Probability value
EXchange Rate EqualJon F-statistic Probability value Exchange Rate-Based Stabilization Plans
Argentina
1967 Plan: 1965:1 -1 9 7 2 :6 " 'v
Inflation 1.257 (0.287) 1.039 (0.407)
Exchange Rate 0.980 (0.444) 0.380 (0.889)
Tablita: 1978:12 - 1981:2
Inflation 0.772 (0.926) 0.255 (0.975)
Exchange Rate 3.398 (0.051) 0.026 (0.399)
Convertibility Plan: 1991:4 -1 9 9 4 :2v
Inflation 8.021 (0.001) 0.547 (0.654)
Exchange Rate 2.160 (0.115) 4.761 (0.008)
Chile
Tablita: 1978:2 - 1982:5
Inllation 26.283 (0.000) 1.480 (0.232)
Exchange Rate 4.765 (0.006) 3.706 (0.018)
Israel 1985:7 -1994:2
Inflation 10.509 (0.000) 6.193 (0.000)
Exchange Rate 2.655 (0.067) 3.449 (0.011)
Mexico 1987:12 - 1994:2
Inflation 6.988 (0.000) 1.324 (0.274)
Exchange Rate 4.533 (0.006) 4.544 (0.006)
~
1968 Plan: 1966:1 -1 9 7 3 :1 21 1
Inflation 1.565 (0.203) 1.579 (0.200)
Exchange Rate 5.635 (0.001) 2.337 (0.079)
Tabrrta: 1978:10 -1982:10
Inllation 7.264 (0.000) 0.723 (0.634)
Exchange Rate 2.278 (0.057) 44.479 (0.000)
1991:1-1994:2
Inllation 0.568 (0.641) 2.139 (0.115)
Exchange Rate 2_349 (0.092) 1.250 (0.309)
Memo item:
Chile
Real Exchange Rate Target; 1985:7 -1991:12
Inllation 1.968
Exchange Rate 0.248
Foreign Inllation 1.054
(0.127) (0.862) (0.374)
3.880 0.632 2.266
(0.013) (0.597) (0.088)
Money-Based Stabilization Plans Chile
1975:4 -1977:12 Inllation Money (M1)
28.036 2.793
(0.000) (0.060)
0.515 1.334
(0.676) (0.284) Dominican Republic
1990:8 - present . Inflation
Money (Ml)
0.367 0.843
(0.587) (0.938)
7.066 1.158
(0.000) (0.371)
N otes: The optim al lag length w as chosen according to the Schw arz: cJiteria D etails are given in the appendix.
!/]hese plans fixed the exchange rate, hence for the duration of the plan it m im ics the constant tem J of the regression and a serious co/linearity problem em erges. To attem t to capture (; period w ere the exchange rate eJdJibitssom e variability,w e broadened the sam ple adding about tw o years of obm vations at both ends. This w as not
feasible for the case of the convertibility plan, since the period im m < 1diatelyduring preceeding it a m oney-bBsed plan w as In effect (sea Table 1)
'11-1lentho sam ple Is extended further back (to 1960:1), there is a ~ignificant causal relationship from the exchange
Table 6. Inflation Stabilization and Growth:
Evidence from Panel Data (1964 - 1993)
Dependent Variable:
Constant Stabilization Plans Dum mies
(M aan) Exchange rate
E a,r1y Lata
Money
Early Late
Annual Growth Rate in Real G DP
3.645 (0.518)
2.331 (1.037)
-5.454 (1.631)
-5.403 (1.931 )
1.822 (2.909)
N o te s : T h e c o u n tr ie s in c lu d e d in · th e s a m p le a r e A r g e n tin a . B r a z il. C h ile . D o m in ic a n R e p u b lic . M e x ic o . P e r u , a n d U r u g u a y . h e n c e th e r e a r e 2 1 0 o b s e r v a tio n s . S ta n d a r d e r r o r s a r e in p a r e n th e s e s . T h e r a n d o m e ffe c ts e s tim a te s a r e r e p o r te d .
Table 7. Output Effects of Exchange Rate-Based Stabilization Plans as the Duratic,o' of the Plan Varies
Level of Real G DP at the end of year:
Beginning of th e
End of th e
program 2 3 4 5 pro gra m
100 100 100 100 100
102.331 102.331 102.331 102.331 102.331
104.716 104.716 104.716 104.716 96.7498
107.157 107.157 107.157 99.0051
109.655 109.655 101.312
112.211 103.674
106.091
N o te s : T h e s e c a lc u la tio n s r e fle c t th e d iffe r e n c e in o u tp u t d u e to th e s ta b iliz a tio n p la n a n d a r e b a s e d on th e e s tim a te s r e p o r te d In T a b le 6 .
C H A ..R~T
1Exchange Rate-Based Stabilization
Orthodox Programs 12-Month Inflation Rates
ARGENTINE TAB UTA CHILEAN TABUTA
December 1978 February 1978
180 60
170 160
150 ~O
140
130 W
120
110 W
100 lO
90
BOO o .~
4 8 12 16 20 24 0 4 8 12 16 20 24 28 32 36 40 44 48 52
Months after beginning o Cstabilization Months after beginning of stabilization
URUGUAY 1968 URUGUAYAN TABLITA
June 1968 October 1978
200 "0
180 m
160 ~O
140
120 ({)
100 ~O
f
80 '0
60 ::0
40
20 :10
°0 36 ]0 -
12 16 20 24 28 32 36 40 44
4 8 12 16 20 24 28 32 40 0 4 8
Months after beginning o Cstabilization Months after beginning o Cstabilization
ARGENTINE CONVERTIBILITY
April 1991
URUGUAYAN PLAN
January 1991 300
4 8 U ~ ~ ~ n
Months af!er beginniot: of stabilization
1'0 -- 1:0 \ 1;0 110 ](0
~O 10
,0 (0
~O
400 7 ~V n· ~
Months aCter ber:innint: of stabilization
Notes: The date for the beginning of the plan is giver above each graph. The 12-month inflation . rates are plotted for the duration of the progr am.
CHART
Exchange Rate-Based Stabilization
Heterodox Programs: 12-Month Inflation Rates
AUSTRAL PLAN
June 1985 1200
1000 800 600 400 200
o 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Months after ~inning of slabilization
CRUZADO
February 1986
250 200 150 100
50 0 1 2 3 4 567 8 9
Months after beginning of slabilization
ISRAELI PLAN MEXICAN PLAN
July 1985 Deccmbc:r 1987
450 180
400 160
350 140
300 120
250 100
200 80
150 60
100 40
50 20
°0 7 14 21 28 0
35 42 49 56 0 7 14 21 28 35 42 49 56
Months after beginning of stabilization Months after beginning of stabilization
Notes: The date for the beginning of the plan is given abov(: each graph. The 12-monlh inflation rates are plotted for the duration of the program. F<'r the ongoing plans (Le.the Israeli and Mexican plans) an arbitrary cut off of five years .vas chosen as the "end" of the plan.
CHART
Money-Based Stabilization
12-Month Inflatior Rates
BONEX (ARGENTINA) COLLOR (BRAZIL)
December 1989 March 1990
25 7000
20 6000
~
.•
5000-ac 15
'"
.•
4000'"
0 10
E,
30005 2000
0 10 1000
(J 1 2 3 4 5 6 7 8 9 10
0 2 4 6 8 12
Months after beginning of stabilization Months after beginning of stabilization
DOMINICAN REPUBLIC PERU
August 1990 August 1990
120 14
100 12 \
~-a
.•
10c 8
~'"
0 6
40
t:
420 2
°0 5 10 15 2(J 25 30 35 00 5 10 15 2(J 25 30 35 40
Months after beginning of stabilization Months after N:ginning of stabilization
Notes: The date for the beginning of the plan is given abo're each graph. The I2-month inflation rates are ploUed for the duration of the program.
CHART 1
Exchange Rate- Based ~tabilization
Orthodox Programs: Real Effecti rc Exchange Rates
ARGENllNE T ABUT A December 1978=100
Cf-IILEAN TABLITA February 1978=100
4 8 12 16 20 24
Months after beginning or stabilization
110
105/
100 95 90 85 80
75 70
650 4 3 12 16 20 24 2S 32 36 40 44 48 52 Me nlhs after beginning or stabilization 100
95 90 85 SO 75 70 65 60 55 500
URUGUAYANTABLITA October 1978=100
AP GENTINE CO NVERTIB rrnY
April 1991=100
110 100
95
4 8 12 16 20 24 2S 32
Me nths arter beginning or stabilization 90
85
60 80
500 4 8 12 16 20 24 2S 32 36 40 44 48 Months after beginning or stabilization
URUGUAYAN PLlli January 1991 =100
100 95 90 85 80 75
700 7 14 2t 28
Months .ftef beginning of sub liution
Notes: A decrease in the index indicates real appreciation. Tlle date for the beginning of the plan is given below each graph. The real exchange ~ates are plotted for the duration' of the program.
CHARTz
Exchange Rate-Based Stabilization
Hctcrodox Programs: Real Effcci ivc Exchange Rates
AUSTRAL PLAN CRUZADO
June 1985=100 February 1986 = 100
104 112
110 100
r
108 98
106 96
94 104
92 102
90 1 2 3 4 5 6 7 8 9 1011 121314 15 100
0 12" 3 4 5 6 7 8 9
0
Months after beginning or stabilization Months after beginning of stabilization
ISRAELI PLAN July 1985=100 104
102 100
98 96 94 92 90 88
860 7 14 21 28 35 42 49 56 Months after beginning or stabilization
MEXICAN PlAN December 1987=100 100
95 90 85 80
75
· 70
65
600 7 14 21 28 35 42 49 56 Months after beginning of stabilization
Notes: A decrease in the index indicates real appreciatillO. The date for the beginning of the plan is given above each graph. The real excl:1ange rates are plotted for the duration of the program. For the ongoing plans ~i.e. the Israeli and Mexican plans) an arbitrary cut off of five years was chosen as th.: "end" of the plan.
CHART
2Money-Based Stabili~:ation Programs
Real Effective Exchange Rates
BONEX (ARGENTINA) COLLaR (BRAZIL)
December 1989=100 March 1990=100
130 lGO
120
no 150
100 140
90
80 130
70
60 120
50 llO
40
30 6 8 10 12 100
0 1 2 3 4 5 6 7 8 9
0 2 4
Months a(ter beginning o( wbilizalion Months after beginning o( stabilization
DOMINICAN REPUBLIC PERU
August 1990=100 August 1990=100
100 140
98
1~
r
%
94 120
92 110
90
88 100
86 90
84
82 80
800 5 10 15 20 25 30 35 40 70
0 5 10 15 20 25 30 35 40
Months a(ter beginning o( stabilization Months after beginning o( stabilization
Notes: A decrease in the index indicates real appreciati on. The date for the beginning of the plan is given above each graph. The real excllange rates are ploued for the duration of the program.
CHAF~T
J,Exchange R a t e - B a s e d S t a b i l i z a t i o n
Orthodox Programs: Tola! Reserves Minus Gold ARGENTINA (1967)March 1967=100
450 400
4 8 U M m M m ~ ~
M o n t h s a C t a - b e g i n n i n g o f s t a b i l i z a t i o n
URUGUAY (1968)
June 1968=100
CHILEAN TABLITA
February1918=100
8 U U m M m II ~ ~ « • II
Months .C,erbeginning of stabtlization
ARGENTINE CONVERTIBILITY
April 1991=100
U 16 m 24 m 32
M o n t h s a f t e r ~gillnin&oC s 1 3 b t l i z . 3 t . i o a
BRAZIL (1964)
March 1964=100
550 500 450 400 350 300 250 200 150 100 •..•..
~O 4 8 U U m M m II ~ ~ « • II
M o n t h s a f t e r b e g i n n i n g o f s t a b i l i z a t i o n
ARGENTINE TABLITA
December 1918=100
200 180 160 1~
1m 100 ..-
80
600 8 U M m M
M o n t h s a f t e r b e g i n n i n g o f s t a b i l i z a t i o n
URUGUAYANTABLITA
January1918=100 1~
1m 100
V
80 60
~
mo 4 8 U H m ~ m II ~ ~ Months aCta beginning of st.abtlization
URUGUAYAN PLAN
January1991=100 180
160 1~
1m
14 21 m
Month •• C'e< beginning of stabilization 35
Notes: The date for the beginning of the plan is given abov( each graph. Total Reserves Minus Gold data is plotted for the duration of the program.
---
.'
CHAR,T'~,3
Exchange Rate-Based Stabilization
Heterodox Programs: Total Reserves Minus Gold
AUSTRAL PLAN CRUZADO
June 1985=100 February 1986=100
260 11
240 105
220 100
200 95
180 90
160 85
140 80
120 75
100 o 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 70
0 1 2 3 4 5 6 7 S 9
Months after beginning of stabilization Months after beginning of stabi1iz:ation
ISRAELI PLAN MEXICAN PLAN
July 1985=100 December 1987=100
260 1
240 140
220
200 120
180 tOO
160 80
140 60
120
100 40
80 20
0 7 14 21 28 35 42 49 56 0 7 14 21 28 35 42 49 56
Months after beginning of stabilization Months after beginning of stabilization
Notes: The date for the beginning of the plan is given aX>ve each graph. The Total Reserves Minus Gold data is plotted for the duration of tlIe program. For the ongoing plans (i.e. the Israeli and Mexican plans) an arbitrary CJt off of five years was chosen as the "end" of the plan.
CHAR
rr
l3Money-Based Stabilization Programs
Total Reserves Minus Gold
CHILEAN PLAN
April 1975= 100 700
600 500 400 300 200 100
°02468WUMMWWll~~W~TI Months after beginning of stabilization
coLLaR (BRAZIL)
March 1990=100 170
160 150 140 1~
120 110
100 1 2 3 4 5 6 7 8 9
Months after beginning of stabilization
500 450 400 350 300 250 200 150 100 0
BONEX (ARGENTINA)
December 1989=100 350
250 30(i
2O<J
150 100
50 0 2 4 6 8 10 12
Months after beginning of stabilization
DOMINICAN REPUBLIC
August 1990=100 450
400 350 300 250 200 150- 100- 50-
o·o 5 10 15 20 25 30 35 40 Months after beginning of stabilization
PERU
August 1990=100
5 10 15 20 'B ' 30' 35
Months after beginning of stabilization ,I 40
Notes: The ~ate for the beginning of the plan is given above each graph. The Total Reserves Minus Gold data is plotted for the duration of the program.
CHART',
4Exchange Rate-Based
S t a b i l i z a t i o n Orthodox Programs: Stock Market Price IndicesARGENTINE TABLITA
Dec<:mbcr 1978=100
700 600 500 400 300 200
<4 & 12 16 20 24 Months after beginning of 6tabilization
CHILEAN TABLITA
Februuy 1978 = 100
350 300 250 200 150 l00 ....•~
500 7"7'12 16 20 24 28 32 36.w « 4S 52 Months after beginning of ltabilization
ARGENTINE C O N V E R T I B I L I T Y April 1991=100
350
300 250 200 150 100
50 0 4 8 12 16 '"~ 28 32
Months after beginning <:>fstabilization
Notes: The date for the beginning of the plan is given above each graph. Ibe stock market price indi~ are plotted for the duration of the program.
CHART
4Exchange Rate-Based Stabilization
Heterodox Programs: .
AUSlRAL PLAN CRUZADO
June 1985=100 Febru~ry 1986=100
350 200
190
300 1&0
170
250 160
150
200 140
no
150 120
110
100 0 1 234 5 6 7 8 9 10 11 1213 14 15 100
1 2 3 4 5 6 7 8 9
Months after beginning of stabilization Moc,ths after beginning of stabiliutioo
MEXICAN PLAN
December 1987=100 1100
1000 900 SOO 700 600 500 400 300 200
100 0 4 8 12 16 20 24 28 32 36 40
«
48 52 56 Months after beginning of stabili~tionNotes: The date for the beginning of the plan is given above each graph. The stock man::et price indi~ are plottod for the duration of the program. For ahe ongoillg plans an arbitrary cut off of five years was chosen as the "end" of the plan.
CHART
4Money- Based Stabilization
Stock Market Price Indices
BONEX (ARGENTINA) COLLaR (BRAZIL)
December 1989=100 Much 1990=100
100 1~
150
90 1<W
to 1~
70 120
110
~ 100
90
50 to
<W
0 4 IS 10 12 70
4 IS
Month&afterbePnnin& or nabiliu.tion Month&afterbePnnin& of mbiliu.tion
PERU (1990 PLAN)
August 19'90 = 100
lto 170 1~
150 1<W 1~
120 110 100) 90
to0 4 ,-. 12 1 IS 20 24 21~ n 36 <W 44 Month&after be&i=in& or nabifuation
Notes: The date foc the beginning of the plan is given above each graph. The stock market price indices an: plotted for the duration of the proram.
Chart 5. Exchango Ratos and Inflation: Programs of tho 1960s·
Effect of Temporary 20% Reduction in tho Rate of Devaluation
Percent
Ar entina 1967 Plan
2
o
-2 -4 -6 -6 -10 -12 -14
· 16 -16 -20
Sample period:
1965:1-1972:6
o 2 4 6 6 10 12 14 16 16 20 22 24
Number of Mon:ths
Percent
2
o
-2 -4 -6 -B
-10 -12 -14 -16 -16 -20
Uru uay 1968 Plan
Sample period:
1966:1 -1973:12
o 2 4 6 6 10 12 '14 16 18 2~ 22 24 26 28 30 32 34 36
Number of Months
N otes: Tem porary refers to a chl'lnge lasting 12m onths. R esults of the estim ated equations aro sum m arized in Tables 8-9.
Sources: International F inancial Statistics, IM F and the authors.
