DOCSLIB.ORG

Fiscal Policy, Growth, and Design of Stabilization Programs

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Fiscal Policy, Growth, and Design of Stabilization Programs Fiscal Policy, Growth, and Design of Stabilization Programs Vito Tanzi The objectives of Fund-supported stabilization programs include a balance of payments viable over the medium run, the promotion of growth under a stable economic environment, price stability, and the prevention of excessive growth in external debt. These objectives do not have the same weight, but each is important in stabilization pro- grams. A narrow interpretation of the Fund's role would emphasize the balance of payments objective and de-emphasize the others. This paper deals with the role of fiscal policy in stabilization pro- grams, emphasizing the structural aspects of fiscal policies since, over the years, these aspects have attracted less attention than has demand management. The Baker initiative of October 1985 called attention to the importance of these structural aspects. The paper does not discuss other elements of program design, such as incentive measures imple- mented through the exchange rate, through import liberalization, through financial deregulation, or through pricing policy, even though these structural elements are obviously important. In coun- tries where institutions necessary for the effective use of other policies are not adequately developed, fiscal policy may be the main avenue to economic development and stability, although, unfortunately, politi- cal pressures, external shocks, and administrative shortcomings have frequently weakened government control over this instrument. Tax evasion, inflation, and the proliferation of exonerations have reduced the government's ability to control tax revenues, while political pres- sures, fragmentation of the public sector, and inadequate monitoring 121 ©International Monetary Fund. Not for Redistribution 122 VITO TANZI systems have undermined its ability to keep public expenditure in check. Far from being the stabilizing factor in the economy that it should be, fiscal policy has itself, in too many instances, become a major destabilizing force contributing to disequilibrium in the exter- nal sector.1 In recent years the connection between fiscal developments and external sector developments has been increasingly recognized. Some have gone as far as to suggest a "fiscal approach to the balance of payments" that considers fiscal disequilibrium as the main cause of external imbalances.2 Although growth was always a primary objective of economic policy, the sustained rates of growth experienced by most countries until the mid-1970s (except for occasional and transitory periods of balance of payments difficulties) made it possible for the Fund, in negotiating stabilization programs, to concentrate on the objective of stabilization in which it had more expertise and an accepted mandate. The increase in oil prices during the 1970s and especially the more recent debt crisis accompanied by the sharp fall in commodity prices brought about a new environment in which external sector disequilibrium could not be easily financed. This forced many countries to pursue (over longer periods than had earlier been the case) stabilization policies aimed at reducing external imbalances or the rate of inflation, policies that some critics considered as inimical to growth. In the face of external shocks, some countries (for example, the Republic of Korea) succeeded in stabilizing their economies and in advancing once again along the road of economic development. Others were less successful. When the need to pursue stabilization policies extended over several years, the short-run political costs of these policies began to loom larger than the longer-run economic benefits; political fatigue set in and some countries became restive under the harness of traditional stabilization programs. The cries of critics that stabilization policies were inhibiting growth became louder and attracted a larger following. Critics advised policymakers to aban- 1 In this paper the impact of fiscal developments on the balance of payments is empha- sized. But, of course, the relationship is not unidirectional. In some cases fiscal dis- equilibrium may initially be created by developments in the balance of payments (say, a fall in export prices). In those cases the important question is whether the government should finance the shortcoming, or whether it should immediately or progressively lower domestic spending to reflect the lower real income of the country. On this, see Tanzi (1986), pp. 88-91; Tabellini (1985); and Chu (1987). 2 For the connection between the fiscal deficit and the balance of payments, see Kelly (1982), pp. 561-602. See also Tanzi and Blejer (1984), pp. 117-36. ©International Monetary Fund. Not for Redistribution DESIGN OF STABILIZATION PROGRAMS 123 don stabilization policies recommended by the Fund and to concen- trate on growth, regardless of the consequences for the balance of payments and the rate of inflation. They espoused the position that inflation is a lesser evil than stagnation and that the external sector can be kept in equilibrium through quantitative restrictions and export subsidies, or by repudiating external debt obligations. As already mentioned, stabilization and growth have always been legitimate policy objectives. Although in the past it was thought that at any given moment a country could focus on policies aimed specifically at one or the other of these objectives, the view that it is unwise to separate these objectives currently predominates. Stabilization pro- grams must pay attention to growth to ensure that stability is not won at the price of stagnation.3 Growth policy must pay attention to sta- bility to ensure that the pursuit of growth is not aborted by excessive inflation or by pressures on the external sector, as has happened in several cases in recent years. Growth without stability may be tech- nically impossible over the longer run; stability without growth may be politically impossible except in the short run. This paper attempts to reformulate the fiscal design of stabilization programs in order to emphasize the growth objective. If stabilization were the only objective of economic policy, stabiliza- tion programs could rely mostly on traditional demand-management policies.4 Stabilization with growth, however, requires that demand- management policies be complemented by policies aimed at in- creasing potential output. Misguided structural policies have reduced potential output by misallocating resources and by reducing the rate of growth of the factors of production. They have thus been the main cause of stagnation and a contributor to economic instability. The design of adjustment programs should integrate stabilization with growth, or demand-management policies with structural, supply-side policies. Fiscal Policy and the Design of Fund Programs Stabilization programs can, in theory, emphasize either specific or general fiscal policies. For example, the country and the Fund could 3 This is particularly important in order to reduce over time the burden of the foreign debt of the countries. 4 But, of course, changes in the exchange rate, which have often been part of traditional stabilization programs, have incentive effects in addition to their demand-management effect. ©International Monetary Fund. Not for Redistribution 124 VITO TANZI agree on a whole range of specific fiscal measures, such as changes in various taxes and tax rates and changes in specific public ex- penditures, subsidies, and public utility rates. These measures, how- ever, would have to add up to the required adjustment in aggregate demand and supply. They must reduce the balance of payments dis- equilibrium and the rate of inflation to the desired level by reducing aggregate demand and by increasing aggregate supply. For identifica- tion I shall call this the microeconomic approach to stabilization pro- grams, an approach that explicitly recognizes both the demand- management and the supply-management aspects of fiscal policy. It recognizes that fiscal policy changes usually affect not only aggregate demand but also aggregate supply.5 Alternatively, the country and the Fund could limit their agreement on a program to general, macroeconomic variables. In the extreme version of this alternative, the Fund and the country might not even discuss specific fiscal policies, but would limit not only their agreement but also their discussions to the size of the fiscal deficit and to the expansion of bank credit associated with that deficit. If specific poli- cies are discussed, it would be to assess their immediate impact on the size of the fiscal deficit and on aggregate demand. In this approach, supply-side aspects of fiscal policy (what I have called the supply-management aspects) would be largely ignored. I shall call this the macroeconomic approach to stabilization policy. This approach implies that once the size of the deficit has been determined, the balance of payments consequences of that deficit have also been determined regardless of the specific measures that the country will employ to achieve the stipulated level of fiscal deficit.6 Whether the 5 Over the years, what I have called the supply-management aspect of fiscal policy has received far less attention than the more traditional demand-management aspect. To put it differently, price (or micro) theory was rarely integrated with income (or macro) theory. Fiscal policy based on the Keynesian framework normally concentrated on the effects of changes in tax levels and public spending levels on aggregate demand. Supply management is a relative newcomer
Load more

Recommended publications
  • The Effectiveness of Fiscal Policy As Stabilization Policy
    The Effectiveness of Fiscal Policy as Stabilization Policy Alan J. Auerbach University of California, Berkeley July 2005 This paper was presented at the Bank of Korea International Conference, The Effectiveness of Stabilization Policies, Seoul, May 2005. I am grateful to my discussants, Takatoshi Ito and Chung Mo Koo, and other conference participants for comments on an earlier draft. I. Introduction Perspectives among economists on the usefulness of fiscal policy as a device for macroeconomic management have moved back and forth over the years. Belief in the active use of the tools of fiscal policy may have reached a relative peak sometime during the 1960s or early 1970s, and practice followed theory. In the United States, perhaps the best illustration of the evolution of theory and practice comes from the investment tax credit (ITC), which, when it was in effect, provided businesses with a strong incentive for equipment investment. The ITC, first introduced during the Kennedy administration in 1962, at a rate of 7 percent, was adjusted frequently in response to changes in economic conditions. It was strengthened in 1964, the same year in which major income tax reductions were introduced, suspended in 1966 during a boom associated with the Vietnam War, reinstated in 1967, “permanently” repealed in 1969 during a period of inflationary pressure, reinstated again in 1971, just after the trough of the first recession since early 1961, and increased to a rate of 10 percent in 1974, toward the end of the next recession. Although not necessarily conceived originally as a tool for stabilization policy, the ITC clearly became one during this period.
    [Show full text]
  • Argentina's Monetary and Exchange Rate Policies After the Convertibility
    CENTER FOR ECONOMIC AND POLICY RESEARCH April Argentina’s Monetary and Exchange Rate Policies after the Convertibility Regime Collapse • ii Contents Introduction 1 1. The Convertibility Regime 2 2. The Post-Convertibility Macroeconomic Regime and Performance 9 2.1 The Main Characteristics of the Economic Recovery 10 2.2 The Evolution of Monetary and Exchange Rate Policies 16 3. A Macroeconomic Policy Regime with a SCRER as an Intermediate Target 25 3.1 The Orthodox Arguments Against RER Targeting 26 3.2 The Exchange Rate Policy 29 3.3 The Exchange Market and Capital Flows 30 3.4 Monetary Policy 31 Conclusion 35 References 36 Chronological Appendix 39 About the Authors Roberto Frenkel is a senior research associate at the Center for Economic and Policy Research in Washington, D.C. and Principal Research Associate at the Centro de Estudios de Estado y Sociedad (CEDES) in Buenos Aires, Argentina. Martín Rapetti is a research assistant at CEDES and a Ph.D. candidate at the University of Massachusetts, Amherst. Acknowledgements This paper was written as part of an international research project on Alternatives to Inflation Targeting for Stable and Equitable Growth co-directed by Gerald Epstein, PERI and Erinc Yeldan, Bilkent University. The authors thank the Rockefeller Brothers Fund, Ford Foundation and UN-DESA for financial support. Additionally, Nelson Barbosa-Filho, Erinc Yeldan and the participants in the workshop on “Alternatives to Inflation Targeting Monetary Policy for Stable and Egalitarian Growth in Developing Countries” held at CEDES in May 13-14, 2005 contributed comments to a previous version of this paper. Finally, the authors thank Julia Frenkel for her collaboration and Erinc Yeldan and an anonymous referee from World Development for their comments and suggestions.
    [Show full text]
  • The Role of Inflation Target Adjustment in Stabilization Policy
    The Role of Inflation Target Adjustment in Stabilization Policy∗ Yunjong Eoy Denny Liez This version: October 31, 2017 Abstract How and under what circumstances can adjusting the inflation target serve as a stabilization-policy tool and contribute to welfare improvement? We answer these questions quantitatively with a standard New Keynesian model that includes cost-push type shocks which create a trade-off between inflation and output gap stabilization. We show that this trade-off leads to a non-trivial welfare cost under a standard Taylor rule, even with optimized policy coefficients. We then propose an additional policy tool of an inflation target rule and find that the optimal target needs to be adjusted in a persistent manner and in the opposite direction to the realization of a cost-push shock. The inflation target rule, combined with a Taylor rule, significantly reduces fluctuations in inflation originating from the cost-push shocks and mitigates the policy trade-off, resulting in a similar level of welfare to that associated with the Ramsey optimal policy. The welfare implications of the inflation target rule are more pronounced under a flatter Phillips curve. JEL Classification: E12; E32; E58; E61; Keywords: Welfare analysis; Monetary policy; Cost-push shocks; Medium-run in- flation targeting; Flat Phillips curve; ∗We thank James Bullard, Efrem Castelnuovo, Chris Edmond, Nicolas Groshenny, Joonyoung Hur, Jinill Kim, Mariano Kulish, Jae Won Lee, James Morley, Ed Nelson, Adrian Pagan, Bruce Preston, Jae W. Sim, Inhwan So, Willem Van Zandweghe, Toshiaki
    [Show full text]
  • Intermediate Macroeconomics: New Keynesian Model
    Intermediate Macroeconomics: New Keynesian Model Eric Sims University of Notre Dame Fall 2012 1 Introduction Among mainstream academic economists and policymakers, the leading alternative to the real business cycle theory is the New Keynesian model. Whereas the real business cycle model features monetary neutrality and emphasizes that there should be no active stabilization policy by govern- ments, the New Keynesian model builds in a friction that generates monetary non-neutrality and gives rise to a welfare justification for activist economic policies. New Keynesian economics is sometimes caricatured as being radically different than real business cycle theory. This caricature is unfair. The New Keynesian model is built from exactly the same core that our benchmark model is { there are optimizing households and firms, who interact in markets and whose interactions give rise to equilibrium prices and allocations. There is really only one fundamental difference in the New Keynesian model relative to the real business cycle model { nominal prices are assumed to be \sticky." By \sticky" I simply mean that there exists some friction that prevents Pt, the money price of goods, from adjusting quickly to changing conditions. This friction gives rise to monetary non-neutrality and means that the competitive equilibrium outcome of the economy will, in general, be inefficient. New Keynesian economics is to be differentiated from \old" Keynesian economics. Old Keyne- sian economics arose out of the Great Depression, adopting its name from John Maynard Keynes. Old Keynesian models were typically much more ad hoc than the optimizing models with which we work and did not feature very serious dynamics.
    [Show full text]
  • Stabilizing Expectations Under Monetary and Fiscal Policy Coordination
    Federal Reserve Bank of New York Staff Reports Stabilizing Expectations under Monetary and Fiscal Policy Coordination Stefano Eusepi Bruce Preston Staff Report no. 343 September 2008 This paper presents preliminary findings and is being distributed to economists and other interested readers solely to stimulate discussion and elicit comments. The views expressed in the paper are those of the authors and are not necessarily reflective of views at the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors. Stabilizing Expectations under Monetary and Fiscal Policy Coordination Stefano Eusepi and Bruce Preston Federal Reserve Bank of New York Staff Reports, no. 343 September 2008 JEL classification: E52, D83, D84 Abstract This paper analyzes how the formation of expectations constrains monetary and fiscal policy design. Economic agents have imperfect knowledge about the economic environment and the policy regime in place. Households and firms learn about the policy regime using historical data. Regime uncertainty substantially narrows, relative to a rational expectations analysis of the model, the menu of policies consistent with expectations stabilization. When agents are learning about the policy regime, there is greater need for policy coordination: the specific choice of monetary policy limits the set of fiscal policies consistent with macroeconomic stability—and simple Taylor-type rules frequently lead to expectations-driven instability. In contrast, non-Ricardian fiscal policies combined with an interest rate peg promote stability. Resolving uncertainty about the prevailing monetary policy regime improves stabilization policy, enlarging the menu of policy options consistent with stability. However, there are limits to the benefits of communicating the monetary policy regime: the more heavily indebted the economy, the greater is the likelihood of expectations-driven instability.
    [Show full text]
  • Activist Stabilization Policy and Inflation: the Taylor Rule in the 1970S
    Activist Stabilization Policy and Inflation: The Taylor Rule in the 1970s Athanasios Orphanides∗ Board of Governors of the Federal Reserve System February 2000 Abstract A number of recent studies have suggested that activist stabilization policy rules responding to inflation and the output gap can attain simultaneously a low and stable rate of inflation as well as a high degree of economic stability. The foremost example of such a strategy is the policy rule proposed by Taylor (1993). In this paper, I demonstrate that the policy settings that would have been suggested by this rule during the 1970s, based on real- time data published by the U.S. Commerce Department, do not greatly differ from actual policy during this period. To the extent macroeconomic outcomes during this period are considered unfavorable, this raises questions regarding the usefulness of this strategy for monetary policy. To the extent the Taylor rule is believed to provide a reasonable guide to monetary policy, this finding raises questions regarding earlier critiques of monetary policy during the 1970s. Keywords: Great Inflation, Taylor rule, output gap, real-time data. JEL Classification System: E3, E52, E58. Correspondence: Division of Monetary Affairs, Board of Governors of the Federal Reserve System, Washington, D.C. 20551, USA. Tel.: (202) 452-2654, e-mail: [email protected]. ∗ I would like to thank David Lindsey and Richard Porter for helpful discussions and comments. The opinions expressed are those of the author and do not necessarily reflect views of the Board of Governors of the Federal Reserve System. 1 Introduction There is widespread agreement that the objective of monetary policy in the United States over the past several decades has been the pursuit of price stability and maximum sustain- able growth over time.
    [Show full text]
  • Effective Demand Failures and the Limits of Monetary Stabilization Policy
    NBER WORKING PAPER SERIES EFFECTIVE DEMAND FAILURES AND THE LIMITS OF MONETARY STABILIZATION POLICY Michael Woodford Working Paper 27768 http://www.nber.org/papers/w27768 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 September 2020, Revised September 2021 An earlier version was presented at the 2020 NBER Summer Institute under the title “Pandemic Shocks, Effective Demand, and Stabilization Policy.” I would like to thank Aloísio Araújo, Gauti Eggertsson, Guido Lorenzoni, Argia Sbordone, Ludwig Straub, Harald Uhlig, and Iván Werning for helpful comments, and Yeji Sung for research assistance. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications. © 2020 by Michael Woodford. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source. Effective Demand Failures and the Limits of Monetary Stabilization Policy Michael Woodford NBER Working Paper No. 27768 September 2020, Revised September 2021 JEL No. E12,E52,E63 ABSTRACT The challenge for stabilization policy presented by the COVID-19 pandemic stems above all from disruption of the circular flow of payments, resulting in a failure of what Keynes (1936) calls “effective demand.” As a consequence, economic activity in many sectors can be inefficiently low, and interest-rate policy cannot eliminate the distortions — not because of a limit on the extent to which interest rates can be reduced, but because interest-rate reductions fail to stimulate demand of the right sorts.
    [Show full text]
  • Explain the Strategy Behind Government Policies to Stabilize the Economy and the Specific Role of the Federal Reserve.”
    Macroeconomics Topic 9: “Explain the strategy behind government policies to stabilize the economy and the specific role of the Federal Reserve.” Reference: Gregory Mankiw’s Principles of Microeconomics, 2nd edition, Chapter 20. Smoothing out the fluctuations: stabilization policy Real GDP in the United States has grown at about 3.3% per year since about 1875. Overtime this has led to the US becoming one of the richest countries in the world. Unfortunately, this growth in real GDP has not been smooth. In some years (expansions) GDP grows much faster than the long term trend, and inflation often increases. while in others (called recessions) real GDP falls. The pattern of recessions and expansion is called the business cycle by economists. Since the burden of poor economic performance during recessions falls principally on the unemployed, policy aimed at eliminating the fluctuations associated with the business cycle seems desirable to most people. Government policy designed to smooth out the business cycle are called stabilization policies. The two primary types of stabilization policy used in the United States are monetary and fiscal policy. Monetary policy Monetary policy attempts to reduce the fluctuations in nominal GDP and unemployment by manipulating the rate of growth in the money supply. Monetary policy is carried out by Federal Reserve Bank’s open market committee. The general strategy is to increase money growth during periods of higher unemployment (recession) and reduce money growth during periods of inflation (excess expansion) Why does increasing the money supply raise aggregate demand? Economists following the writings of John Maynard Keynes believe that recessions stem mostly from unusually low aggregate demand for final goods and services.
    [Show full text]
  • Evolution of Economic Understanding and Postwar Stabilization Policy
    The Evolution of Economic Understanding and Postwar Stabilization Policy Christina D. Romer David H. Romer Introduction I Over the past fifty years, there have been large changes in aggregate demand policy in the United States, and, as a consequence, substantial changes in economic performance. In the 1950s, monetary and fiscal policy were somewhat erratic, but moderate and aimed at low infla- tion. As a result, inflation was indeed low, and recessions were fre- quent but mild. In the 1960s and 1970s, both monetary policy and fis- cal policy were used aggressively to stimulate and support rapid eco- nomic growth, and for much of the period unemployment was remark- ably low. But inflation became a persistent problem, and periodic severe recessions were necessary to keep inflation in check. In the 1980s and 1990s, aggregate demand policy became more temperate and once again committed to low inflation. Not surprisingly, inflation has been firmly under control for almost twenty years now, and the American economy experienced two decade-long expansions at the end of the twentieth century, interrupted only by one of the mildest postwar recessions. Given the consequences of these changes in policy, it is important to understand what has caused them. Our contention is that the funda- mental source of changes in policy has been changes in policymakers’ beliefs about how the economy functions. We find that while the basic 11 12 Christina D. Romer and David H. Romer objectives of policymakers have remained the same, the model or framework they have used to understand the economy has changed dramatically. There has been, as our title suggests, an evolution of eco- nomic understanding.
    [Show full text]
  • The Austral Plan
    This PDF is a selection from an out-of-print volume from the National Bureau of Economic Research Volume Title: Developing Country Debt and Economic Performance, Volume 2: The Country Studies -- Argentina, Bolivia, Brazil, Mexico Volume Author/Editor: Jeffrey D. Sachs, editor Volume Publisher: University of Chicago Press, 1990 Volume ISBN: 0-226-73333-5 Volume URL: http://www.nber.org/books/sach90-1 Conference Date: September 21-23, 1987 Publication Date: January 1990 Chapter Title: The Austral Plan Chapter Author: Rudiger Dornbusch, Juan Carlos de Pablo Chapter URL: http://www.nber.org/chapters/c8927 Chapter pages in book: (p. 91 - 114) 91 ArgentindChapter 5 inevitable because the inflation tax, with sufficient financial adaptation, can be almost entirely evaded and hence the budget deficit cannot be financed. The Olivera-Tanzi effect, the shortening of contracts, and financial adaptation all react in a perverse way (from the point of view of stabilization) in that they widen the deficit and accelerate explosively the inflation process. 4.4 Concluding Remarks: Why Stabilization Is Difficult The preceding discussion has an immediate bearing on the fact that stabiliza- tion is difficult and, more often than not, takes more than one attempt to succeed. In the process of high inflation all institutions melt. When stabilization is undertaken, there is neither immediate, spontaneous resumption of longer adjustment periods for wages and prices, nor an instant increase of real money demand to noninflationary levels. As a result, more sizable adjustments in the budget are required and more dramatic measures are necessary to create the confidence that stabilization will last.
    [Show full text]
  • Optimal Monetary Stabilization Policy∗
    Optimal Monetary Stabilization Policy∗ Michael Woodford Columbia University Revised October 2010 Contents 1 Optimal Policy in a Canonical New Keynesian Model . 3 1.1 The Problem Posed . 4 1.2 Optimal Equilibrium Dynamics . 7 1.3 The Value of Commitment . 13 1.4 Implementing Optimal Policy through Forecast Targeting . 17 1.5 Optimality from a \Timeless Perspective" . 24 1.6 Consequences of the Interest-Rate Lower Bound . 31 1.7 Optimal Policy Under Imperfect Information . 40 2 Stabilization and Welfare . 44 2.1 Microfoundations of the Basic New Keynesian Model . 44 2.2 Welfare and the Optimal Policy Problem . 50 2.3 Local Characterization of Optimal Dynamics . 54 2.4 A Welfare-Based Quadratic Objective . 63 2.4.1 The Case of an Efficient Steady State . 64 2.4.2 The Case of Small Steady-State Distortions . 69 2.4.3 The Case of Large Steady-State Distortions . 71 2.5 Second-Order Conditions for Optimality . 74 2.6 When is Price Stability Optimal? . 76 3 Generalizations of the Basic Model . 79 3.1 Alternative Models of Price Adjustment . 79 3.1.1 Structural Inflation Inertia . 81 3.1.2 Sticky Information . 88 3.2 Which Price Index to Stabilize? . 92 ∗Prepared for the new (2010) volumes of the Handbook of Monetary Economics, edited by Ben- jamin M. Friedman and Michael Woodford. I would like to thank Ozge Akinci, Ryan Chahrour, V.V. Chari, Marc Giannoni and Ivan Werning for comments, Luminita Stevens for research assistance, and the National Science Foundation for research support under grant SES-0820438. 3.2.1 Sectoral Heterogeneity and Asymmetric Disturbances .
    [Show full text]
  • Stop and Go Since the Austral Plan Miguel A
    Policy, Planning, and Research WORKING PAPERS Macroeconomic Adjustment and Growth Country Economics Department The World Bank March 1989 Public Disclosure Authorized WPS 162 Public Disclosure Authorized inflation in Argentina: Stopand Go Sincethe AustralPlan Public Disclosure Authorized MiguelA. Kiguel Why did the Austral plan fail to curb inflation on a sustained ba- sis? Sophistication in the design of a stabilization program is no substitute for addressing fundamental imbalances, contends the author - and price controls, improperly used, can make the problem worse. Public Disclosure Authorized The Policy, Planning, and Research Complex distributes PPR Working Papers to disseminate the findings of work in progress and to encourage the exchange of ideas among Bank staff and al others interested in development issues. These papers carry the names of the authors, reflect only their views, and should be used and cited accordingly. Ibe findings, interpretations, and conclusions are the authors' own. They should not be attributed to the World Bank, its Boardof Directors, its management, or any of its member countries. Plc,Planning,and Research McocnomicAdjustment and Growth The Austral plan, launched in 1985, was Argen- The authorities did not think through how to tina's most recent stabilization strategy for liberalize prices - when, how, and under what reducing high inflation. A heterodox program, it condition to remove price controls - without combined orthodox components - tiaht fiscal bringing back inflation. policy and monetary restraint - with iess conventional wage and price controls. The chief advantage of controls is also their chief drawback. They can quickly reduce The Austral plan failed to bring inflation inflation, leading authorities to underestimate down on a sustained basis, but it provided useful serious underlying imbalances.
    [Show full text]