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The author would like to thank Timothy Lane, Enrica Detragiache, Martin Uribe, and an anonymous referee for their helpful comments, and Sibabrata Das for valuable research assistance.
The main stylized facts of ERBS were identified by Kiguel and Liviatan (1992) and Vegh (1992). Calvo and Vegh (1994) and Reinhart and Vegh (1994) lend further support to the notion of an ERBS syndrome.
A key assumption made in the papers that try to explain the ERBS syndrome is that the selection of the nominal anchor is an exogenous decision. While this paper does not test formally the hypothesis that anchor selection may be endogenous, it tries to shed some light on the issue by trying to identify systematic differences in the behavior of key macroeconomic variables in pre-stabilization years.
This represents a sub-set of countries for which the IMF publishes data which excludes the eastern European countries and the former republics of the Soviet Union.
Even in those cases, other stabilization policies may have been put in place before the announcement of a path for the exchange rate, thus obscuring the timing of stabilization.
The following episodes were identified but are not included in Table 1: Nicaragua 1981 (as a large share of prices were controlled by the government); and Afghanistan 1992, Equatorial Guinea 1986, Guinea Bissau 1982, and Somalia 1991 (either because of unreliable inflation data or lack of data on other variables also studied in this paper).
Strictly speaking, the rule produced 28 episodes. Six additional episodes, denoted by italics in Table 1, were identified when the threshold was lowered to 35 percent in an attempt to capture “near misses.” This exercise was also carried out for Criteria (3) and (4).
The reason for this was the availability of data: there was a relatively large number of countries for which the series of end-of-period inflation rates contained missing observations. As a result, annual average inflation rates were used which, admittedly, will tend to push forward the stabilization date by one year. The significance of this point is discussed later.
Since the “stabilization year” is set here as the first year in which a meaningful reduction in inflation takes place, and not as the peak inflation year as in Easterly (1996), dates for Criterion (1) in Table 1 have been adjusted to make them comparable to those obtained for Criteria (2)-(4).
Table 1 shows a stabilization date of 1975 for Chile under Criterion (3) and 1977 under Criterion (4). In fact, according to Criterion (3) a “stabilization” occurred every year in Chile in the period 1975-78, but only the first year of this continuum is shown on Table 1. Under Criterion (4) this stabilization period begins in 1977.
Due to the absence of current account convertibility, the stabilization programs in Bangladesh 1975 and Ghana 1984 were not considered ERBS.
It must be stressed here that Easterly′s (1996) study focuses on growth and, unlike this paper, does not look at the behavior of the other variables associated with the ERBS syndrome. In this sense, Sample 1 is an extension of that used by Easterly.
See, for example, the chapter on exchange rate regimes and financial discipline in Aghevli, Khan, and Montiel (1991).
Notice that in the cases of inflation and money growth the charts show a transformation, X/(l+X), rather than the actual level of the variable in order to prevent the width of the associated confidence interval from obscuring the changes in the median.
The abbreviation “p.p.” is used to denote “percentage points.”
This would explain why OS are not found to be recessionary, as would be expected in the case of pure MBS. I am indebted to Martin Uribe for this point. His 1999 paper (see the Reference section) provides a detailed comparison of pure MBS vs. those that allow for an initial remonetization of the economy.
The reader will recall that the selection rule underlying Sample 2 requires a reduction of the inflation rate of at least one-quarter.
An (admittedly crude) attempt at comparing the dynamics of interest rates between ERBS and OS was made, using monthly data for the stabilization year. This exercise revealed no clear differences in the behavior of real interest rates across stabilization strategies: real (deposit or T-bill) interest rates exhibited no trend during the year; were somewhat more volatile in the case of OS; and averaged about 4 percent in ERBS vs. 0.25 percent in OS, but this difference was not statistically significant.