Crisis, Stabilization, and Economic Reform: Therapy by Consensus

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This book examines the phenomenon of the high inflation processes of the 1970s and 1980s as exemplified by Argentina, Brazil, and Israel. It explores the common characteristics of such processes and their possible cures—with some emphasis on the lessons of the Israeli experience in respect of the role of incomes policy and the political economy of stabilization. The discussion of the theoretical underpinnings of "shock" treatments provides a good example for the blending of a number of disciplines: lessons of economic history, open economy monetary and macro theory, game-theory applications to economic policy design (concepts such as dynamic inconsistency, government reputation, and credibility) and the rationalization of incomes policy.

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Editorial Reviews

From the Publisher
"The author offers an excellent mix of theory and data analysis....He excels in drawing general lessons from this comparative study of economies....This volume can be recommended to all policy makers and academics specializing in inflation."—Journal of Economic Literature

"Exciting reading....Provides a rare, and quite fascinating, insider's look at the trials and tribulations of policymaking....The arguments are well presented and clearly articulated....Bruno writes with the vigor and enthusiasm of an insider."—Finance & Development

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Product Details

  • ISBN-13: 9780198286639
  • Publisher: Oxford University Press
  • Publication date: 9/30/1993
  • Series: Clarendon Lectures in Economics Series
  • Pages: 320
  • Product dimensions: 6.62 (w) x 9.82 (h) x 1.04 (d)

Table of Contents

List of Figures
List of Tables
1 High Inflation, Growth Crisis, and Reform: Historical Perspective and Brief Overview 1
1.1 Recent Comparative International Experience 1
1.2 Explosive Hyperinflations of the 1920s 3
1.3 Chronic High Inflation in Recent History 6
1.4 Emergence of the 'Heterodox' Approach to Stabilization 11
1.5 Structural Crisis and Reform as Protracted Processes: An Overview of the Issues 14
2 The Gathering Storm: Israel's Structural Crisis in the 1970s 23
2.1 Growth and Productivity: A Historical Perspective 25
2.2 International Comparison of Growth and Inflation 27
2.3 The Government Budget: From Growth to Redistribution 30
2.4 Ballooning Internal and External Debt 34
2.5 Implications for the Structure of Employment 36
2.6 Savings, Investments, and Rates of Return 38
2.7 The Self-Reinforcing Nature of the Structural Crisis: A Partial Summary 40
3 Shocks and Accommodation: The Dichotomy and Mechanics of High Inflation 42
3.2 Budget Finance, Seigniorage, and Average Inflation 44
3.3 From Single- to Three-Digit Inflation: The Changing Trade-off between Real GDP, Inflation, and the Current Account 49
3.4 Aggregate Supply and Demand, and the Analytics of Nominal Anchors 59
3.5 Time-Invariance of the Basic Inflation Equation 63
3.6 Backward Indexation and Changing Inflation Dynamics 67
Mathematical Appendix 76
4 Preparing for a Comprehensive Stabilization Programme 1981-1985: Doctrinal Debates, Politics, and Trial by Error 78
4.1 Introduction: Ideas, Economists, and Politicians 78
4.2 Economists' Changing Views on Exchange Rates, Inflation, and Stabilization 80
4.3 A Digression on the Players in the Political Game 84
4.4 Deepening Crisis, Lebanon, and a Dollarization Fiasco, 1981-1984 87
4.5 The National Unity Government in its First Year 1984-1985, or The Fine Art of Muddling Through 92
4.6 Economists are Finally Given a Chance 96
4.7 Outline of the July Programme 102
4.8 Politics and the Social Wage Contract 106
5 The Fight over Stabilization and the Structural Adjustment Process, 1985-1991 108
5.2 Phase 1: Early Tests of Fiscal and Exchange-Rate Credibility 112
5.3 Phases 2 and 3: The Post-Stabilization Business Cycle 119
5.4 Establishing Fiscal Credibility 128
5.5 The Struggle over the Establishment of a Nominal Anchor: Credibility and Learning 134
5.6 A Digression on the Role of Price Controls and their Removal 143
5.7 Structural Adjustment and the Reform Process 147
6 Latin American Comparisons: Failures, Successes, Heterogeneity 156
6.2 Chile: From Democracy to a Socialist Experiment 158
6.3 The Military Government and the Lessons of Pure Orthodoxy 162
6.4 From Tablita to Confidence Crisis 164
6.5 Recovery and Normalization: Reaping the Benefits of Reform 168
6.6 How Different was Argentina from Chile in the 1970s? 171
6.7 Argentina and Bolivia in 1985: Why was the Austral Plan Short-Lived? 175
6.8 Price Controls without Fundamentals: Brazil and Argentina in 1986-1990 182
6.9 Argentina's 1991 Convertibility Plan: Has the Turning-Point Finally Come? 188
6.10 Mexico's Successful Heterodox Stabilization and Reform 190
7 Stabilization and Reform in Eastern Europe 200
7.2 Yugoslavia's Inflation in the 1980s and the 1989-1990 Reform Effort 207
7.3 Poland and the East European Economies: Initial Conditions and Country Programmes 211
7.4 Stabilization: Was the Initial Price Shock Necessary? 218
7.5 Was the Output Collapse Unavoidable? 224
7.6 Was the Fiscal Balance Sustainable? 230
7.7 What to Do with Bad Loan Portfolios and Enterprise Arrears? 234
7.8 Privatization of Large State-Owned Enterprises: What to Do during the Long Transition? 238
7.9 The Ingredients of Macro-Policy during the Transition 241
8 Synthesis, Policy Lessons, and Open Questions 248
8.2 Common Factors in Crisis Entry or Avoidance 250
8.3 Crisis, Macro-Policy, and Reform: A Diagrammatic Exposition 256
8.4 Why are Stabilizations and Reforms Delayed? 262
8.5 Components of a Stylized Stabilization and Structural Reform 268
8.6 The Sequencing and the Speed of Implementation 273
References 280
Index of Subjects 291
Index of Names 298
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