| Summary: | OUNTRIES experiencing high inflation typically make several disinflation attempts, some of which succeed only temporarily. Perhaps the best-documented cases of failed stabilizations are in Latin America: the Southern Cone tablita experiments of the late 1970s and early 1980s (the authorities preannounced the currency’s rate of depreciation in an effort to guide inflation expectations) and the heterodox programs of the mid-1980s (stabilization efforts were supported by price and wage con-trols). At the same time, some Latin American countries— like Bolivia in the mid-1980s and Nicaragua and Peru in the early 1990s—have enjoyed spectacular success. Outside Latin America, Israel’s stabilization in the mid-1980s is a well-known success, and Iceland, having failed to tame inflation in the mid-1970s, finally succeeded in the mid-1980s. To our knowledge, there has been only one attempt to identify empirically the reasons many disinflations ulti-mately fail (Francisco José Veiga’s 1999 article, “What Causes the Failure of Inflation Stabilization Plans? ” in the Journal of International Money and Finance). We therefore undertook a study of 51 stabilization episodes (see box and table). Our focus on the durability of stabilization and the scope of our study—in terms of sample size and the range of questions addressed—distinguish our analysis from the rest of the lit-erature on disinflation. We found that luck, initial condi-tions, and political institutions were the most important factors in the success or failure of disinflation. The evolution of nonpolicy macro variables—such as the real exchange rate, GDP growth, and international reserve levels—and policy variables—such as monetary and fiscal adjustment—played a lesser but still important role. This finding may reflect the fact that macroeconomic adjustment itself depends on initial conditions and political factors and should not be inter-preted as meaning that macro policies are not important. Good luck If a country trying to stabilize prices and wages is unlucky ...
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