Front Matter Page Policy Development and Review Department
Authorized for distribution by Timothy D. Lane
II. Identifying Stabilization Episodes
III. Nominal Anchors and Stylized Facts
A. Financial discipline
B. The ERBSsyndrome
C. Success or failure of ERBS
IV. Summary and Conclusions
1. Sample 1: Inflation, Monetary and Fiscal Accounts
2. Sample 2: Inflation, Monetary and Fiscal Accounts
3. Sample 1: Growth of GDP and per-capita GDP during Disinflation
4. Sample 2: Growth of GDP and per
I. I ntroduction
In recent years, several articles have identified a set of empirical regularities that arise during exchange rate-based stabilization (ERBS) in high inflation countries. These empirical regularities are presumably not observed when the inflation stabilization strategy does not rely on the use of the exchange rate and are, thus, commonly referred to as the ERBS “syndrome”. 2 The main features of the syndrome include a boom-bust cycle (as opposed to the initial recessionary effects of money-based stabilizations); a consumption (and sometimes
Do exchange-rate-based stabilizations generate distinctive economic dynamics? To address this question, this paper identifies stabilization episodes using criteria that differ from those in previous empirical studies of exchange-rate-based stabilizations. We find that, while some differences can be detected between exchange-rate-based stabilizations and stabilizations where the exchange rate is not the anchor, the behavior of important variables does not appear to differ—especially output growth, which is good in both cases. There is also no evidence that fiscal discipline is enhanced by adopting an exchange-rate anchor, or that there are any systematic differences in the success records of stabilizations that use the exchange rate as a nominal anchor and those that do not.
This paper re-examines the issue of the existence of threshold effects in the relationship between inflation and growth, using new econometric techniques that provide appropriate procedures for estimation and inference. The threshold level of inflation above which inflation significantly slows growth is estimated at 1-3 percent for industrial countries and 11-12 percent for developing countries. The negative and significant relationship between inflation and growth, for inflation rates above the threshold level, is quite robust with respect to the estimation method, perturbations in the location of the threshold level, the exclusion of high-inflation observations, data frequency, and alternative specifications.
The IMF Research Bulletin, a quarterly publication, selectively summarizes research and analytical work done by various departments at the IMF, and also provides a listing of research documents and other research-related activities, including conferences and seminars. The Bulletin is intended to serve as a summary guide to research done at the IMF on various topics, and to provide a better perspective on the analytical underpinnings of the IMF’s operational work.
empirical regularities that arise when inflation is brought down from chronically high levels using the exchange rate as the nominal anchor. 1 The main features of this so-called ERBS “syndrome” include a boom-bust cycle in output, as opposed to the recessionary effects of MBS; a surge in consumption and investment; a pronounced real exchange rate appreciation; and worsening external accounts. Subsequently, a substantial amount of research—much of it carried out at the IMF—was devoted to further identifying the distinctive features of this syndrome and, later, to
was successful despite occasional devaluations and--in one case (Italy)--the abandonment of the exchange rate peg; and most programs were not accompanied by an initial expansion, as disinflation tended to be contractionary. Italy in 1987–92 and Greece in 1994–96, however, exhibited most of the elements of the ERBSsyndrome identified in developing countries.
Aside from the common features mentioned above, the four programs reviewed here differed among themselves in terms of both the strength of the exchange rate commitment and the policies that accompanied
In recent years, several articles have identified a set of empirical regularities that arise during exchange-rate-based stabilization (ERBS) in high inflation countries. These empirical regularities are presumably not observed when the inflation stabilization strategy does not rely on the use of the exchange rate and are, thus, commonly referred to as the ERBS “syndrome.” 1 The main features of the syndrome include a boom-bust cycle (as opposed to the initial recessionary effects of money-based stabilizations); a consumption (and sometimes also an
Mr. Charalambos Christofides, Mr. Atish R. Ghosh, Ms. Uma Ramakrishnan, Mr. Alun H. Thomas, Ms. Laura Papi, Mr. Juan Zalduendo, and Mr. Jun I Kim
-called ERBSsyndrome), namely a substantial real exchange rate appreciation and related deterioration in the external accounts, which often leads to a balance of payments crisis, and a boom-bust cycle in GDP, consumption, and investment. 2 ERBS have been linked to financial crises as well. 3 The ability of a predetermined exchange rate regime to impose discipline on other policies, notably fiscal policy, is also disputed. 4 In addition, overvaluation under a pegged exchange rate regime may mask temporarily the extent of public indebtedness.
But other authors challenge
I. I ntroduction
An extensive literature has studied exchange rate–based inflation stabilization (ERBS) in chronic, high inflation countries (mainly in Latin America). This work shows that economies tend to respond to stabilization along broadly similar lines, but the theories that have been proposed and tested to explain the observed pattern still leave many aspects of the ERBS “syndrome” unexplained. 2 Of special concern is the observation that, after some initial success, often programs are abandoned with dire consequences for the economy, including a