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Stabilization Policies
Stylized Facts on Hyperinflations and Chronic Inflations
Money Based
Stabilization Policies
MBS
•Recesión (caída PBI)
•Apreciación TCR
•TB puede mejorar
• al principio
•Aumento de tasas
•Reales
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
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
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 don´t 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
Stopping Hyperinflation: Stylized Facts
The post World War I
Austria
Germany
Hungary
Poland
Russia
The post World War II
ERBS
Fiscal Adjustments
Hungary
Greece
Taiwan 1945-49
Aid from US
Bolivia 1984-1985
ERBS
Fiscal Adjustments
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.
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.
Heterodox programs of the mid-1980´s
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.
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/e+c*)=m
The consumer holds an internationally traded bond b
Real financial wealth is
a= m+b