Abstract

Inflation control was an essential element of reform programs in Latin America and also the one in which achievements were most notable and enduring. Yet the means used to achieve rapid, up-front reductions in inflation—generally exchange rate-based anchors for monetary policy—led to imbalances over the longer term that increased countries’ vulnerability to financial crises. Such regimes would have been sustainable only if a highly prudent approach had been taken to fiscal policy, combined with aggressive measures to increase the flexibility of prices and wages and raise the share of external trade in overall activity. In the event, reform programs in these areas were inadequate, and the “hard” exchange rate regimes eventually failed in the midst of financial turmoil. At the same time, these stabilization plans may have been necessary to arrest very high initial rates of inflation. They also left a legacy of broad popular support for low inflation that likely contributed to the successful implementation of subsequent approaches to monetary management, notably the inflation-targeting frameworks adopted in Mexico and Brazil.