Stabilization programs in chronic-inflation countries: evidence from Latin America

Abstract

Chronic inflation has affected Latin America for decades, leading to many stabilization attempts. We develop a novel database with 46 stabilization/disinflation programs across 13 Latin American countries (1970–2020), classifying them as failures, temporary stabilizations, or lasting stabilizations. Our main findings are: 1) programs have failed very often; 2) the nominal exchange rate acts as a de facto anchor, decelerating faster than inflationand causing real exchange rate appreciation; 3) lasting stabilizations begin with stronger fiscal and balance of payments (BoP) positions; 4) lasting stabilizations are preceded by BoP and fiscal adjustments associated with GDP contractions; 5) lasting stabilizations keep fiscal accounts balanced for several years ; 6) stabilizations typically boost short-run growth; 7) the current account worsens during stabilizations; 8) temporary stabilizations are interrupted by currency depreciations; and 9) many stabilization experiences end in currency crises despite their success in ending chronic inflation.