Disinflation and the Recession-Now-Versus-Recession-Later Hypothesis : Evidence From Uruguay

Author/Editor:

Alexander W. Hoffmaister ; Carlos A. Végh Gramont

Publication Date:

October 1, 1995

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

Both analytical models and casual empiricism suggest that the timing of the recessionary costs associated with inflation stabilization in chronic inflation countries may depend on the nominal anchor which is used. Under money-based stabilization, the recession occurs at the beginning of the program, while under exchange rate-based stabilization the recession occurs later in the program. This paper provides a first attempt to formally test this hypothesis using a vector-autoregression model for Uruguay. The impulse response of output to different stabilization policies is broadly consistent with the “recession-now-versus-recession-later” hypothesis. The evidence also suggests, however, that the effectiveness of a monetary anchor in reducing inflation is hindered by the high degree of dollarization of the Uruguayan economy.

Series:

Working Paper No. 95/99

Subject:

Notes:

Also published in Staff Papers, Vol. 43, No. 2, June 1996.

English

Publication Date:

October 1, 1995

ISBN/ISSN:

9781451852219/1018-5941

Stock No:

WPIEA0991995

Price:

$15.00 (Academic Rate:$15.00)

Format:

Paper

Pages:

46

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