Inflationary Rigidities and Orthodox Stabilization Policies: Lessons from Latin America

Kiguel & Liviatan, 1988.

Orthodox stabilization programs in Latin American countries have been notoriously unsuccessful in combating inflation, despite the imposition of stringent cuts in government deficits. In most cases inflation came down only slowly and temporarily, with concomitant declines in growth and employment. The Bolivian progam, one of the only Latin American successes, is contrasted with those of Argentina, Brazil, Chile, and Mexico. The problems of dealing with chronic inflation are compared with those of hyperinflationary countries, and the influence of price and wage rigidities, expectations, and credibility is explored. The study shows that fiscal restraint is a necessary but not sufficient condition for success, and that sound management of nominal variables (the exchange rate and money supply) are also necessary. The critical role of credibility is linked with price and wage rigidities in the chronic inflation countries, whereas the unsustainability of hyperinflation is seen to increase the credibility of and thus the potential for successful stabilization programs.