WHEN DO HETERODOX STABILIZATION PROGRAMS WORK?: Lessons from Experience

Publisher Website
Google Scholar
Abstract
What advantages and disadvantages does the heterodox strategy offer to stabilization programs in countries with chronic high inflation? Heterodox stabilization programs, in our definition, are those that support orthodox policies— that is, tight fiscal policy and a fixed exchange rate—with the initial, temporary use of incomes policies— that is, price and wage controls. This evaluation, based on several heterodox programs, successful and unsuccessful, from the 1960s and 1980s in Latin American countries and Israel, affords four principal lessons: * The rapid reduction in inflation at the beginning of heterodox programs (which usually comes about at small cost) is the easy part; the problem is to maintain price stability over time. * Incomes policies in heterodox stabilization programs are justified only in countries with high chronic inflation, where persistent inflation is more pervasive and problematic. * There is a case for a bigger fiscal adjustment in heterodox than in orthodox programs because of the risk that a program with price controls may be misperceived as a populist device for achieving price stability without adjusting. * The failure of a heterodox program is more likely to destabilize inflation than is the failure of an orthodox program.

This publication has 0 references indexed in Scilit: