Stabilization programs in chronic-inflation countries: Evidence from Latin America With Martín Rapetti and Joaquín Waldman (Spanish version). Accepted in Oxford Development Studies.
Chronic inflation has affected Latin America for decades, leading to a large number of disinflation/stabilization attempts. In this article, we develop a novel database with 46 stabilization programs in 13 Latin American countries between 1970-2020. We classify them into three categories: failures, temporary stabilizations, and lasting stabilizations. We study which factors have contributed to lasting disinflations. Our main findings are: 1) programs have failed to stabilize very often; 2) the nominal exchange rate (NER) acts as a de facto anchor in the stabilization process, decelerating faster than prices, even when it is not the instrumental anchor chosen by the authorities; this means that the real exchange rate (RER) always appreciates during stabilization; 3) the pre-existence of multiple exchange rates has not prevented lasting stabilization; 4) lasting stabilizations begin with stronger fiscal and balance of payments (BoP) positions; 5) lasting stabilizations are preceded by BoP and fiscal adjustments; 6) lasting stabilizations keep fiscal accounts balanced for several years after the program is launched; 7) stabilizations boosts economic growth in the short run; 8) the current account of the BoP worsens during the stabilization process; 9) temporary stabilizations are interrupted by NER and RER depreciations; and 10) many stabilization experiences end up in currency, financial and sovereign debt crises. We offer a theoretical explanation to rationalize them.