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Planes de estabilización: Evidencia de América Latina

Palazzo, Gabriel and Rapetti, Martin and Waldman, Joaquin (2023): Planes de estabilización: Evidencia de América Latina.

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Chronic inflation has affected Latin America for decades, leading to numerous stabilization attempts. In this article, we develop a novel database with 46 stabilization plans in 13 Latin American countries between 1970-2020, which we classified into three categories: failures, transitory stabilizations, and successful stabilizations. We study which factors have contributed to the plans’ success in lowering inflation. We find that: 1) plans have failed too often; 2) successful plans stabilize the nominal exchange rate (NER); 3) the NER operates as an anchor, decelerating faster than prices; 4) the NER is the instrumental anchor most used; 5) the NER acts as a de facto anchor even when it is not the instrumental anchor; 6) the pre-existence of multiple exchange markets has not prevented stabilization; 7) successful stabilizations begin with higher current account balances; 8) successful stabilizations begin with more robust fiscal accounts; 9) successful stabilizations are preceded by adjustments in external and fiscal accounts; 10) countries correct relative prices before launching a plan; 11) successful stabilizations keep fiscal accounts balanced after the announcement; 12) there are exogenous shocks that can contribute to the failure of a plan; 13) stabilization allows to grow again; 14) the current account balance worsens after the stabilization; 15) transitory stabilizations are interrupted by NER jumps; and 16) many stabilizations end in exchange, financial and sovereign debt crises. The NER plays a key role in stabilization processes in two ways: through its direct impact on tradable prices and through its indirect impact on wage setting and other non-tradable prices. The NER stabilization critically depends on the macroeconomic fundamentals. If the fiscal deficit is high, the NER will eventually depreciate, and the inflation rate will rise. The same will occur if the current account shows a high deficit. The election of the NER as an instrumental anchor depends on the economic situation at the time of the stabilization plan launch. Exchange rate anchors are less frequent when a country has low international reserves and external imbalances. Using the NER as an instrumental anchor implies risks since it accentuates the real appreciation that occurs in any stabilization.

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