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Disinflation and the Recession-Now-Versus-Recession-Later Hypothesis: Evidence From Uruguay
Author:
Mr. Carlos A. Végh Gramont null

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and
Mr. Willy A Hoffmaister
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Series:
IMF Working Papers
Volume/Issue:
Volume 1995: Issue 099
Language:
English
Publication Date:
01 Oct 1995
DOI:
https://doi.org/10.5089/9781451852219.001
ISBN:
9781451852219
ISSN:
1018-5941
Pages:
46
Keywords:
WP; rate depreciation; stabilization program; inflation persistence; rate of exchange; disinflation program; Exchange rate.; output expansion; inflation inertia; output effects of inflation stabilization; inflation rate; Inflation; Exchange rates; Nominal anchors; Disinflation; Real exchange rates
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IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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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.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund