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

By Carlos A. Végh Gramont, Willy A Hoffmaister

October 1, 1995

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Carlos A. Végh Gramont, and Willy A Hoffmaister. Disinflation and the Recession-Now-Versus-Recession-Later Hypothesis: Evidence From Uruguay, (USA: International Monetary Fund, 1995) accessed December 26, 2024

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.

Subject: Disinflation, Exchange rates, Foreign exchange, Inflation, Monetary policy, Nominal anchors, Prices, Real exchange rates

Keywords: Disinflation, Disinflation program, Exchange rate., Exchange rates, Inflation, Inflation inertia, Inflation persistence, Inflation rate, Nominal anchors, Output effects of inflation stabilization, Output expansion, Rate depreciation, Rate of exchange, Real exchange rates, Stabilization program, WP

Publication Details

Pages:

46
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1995/099
Stock No:

WPIEA0991995
ISBN:

9781451852219
ISSN:

1018-5941

Notes

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

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