Pollcy, Research, and Exiernal Affairs WORKING PAPERS Macroeconomic Adjustment | and Growth Country Economics Department The World Bank October 1990 WPS 513 The Business Cycle Associated with Exchange-Rate-Based Stabilization Miguel A. Kiguel and Nissan Liviatan Disinflation programs in chronic inflation countries do not normally follow the usual Phillips curve tradeoff in the medium run. Instead of having a sharp recession in the early stage of stabilization, there often is an initial expansion of output fol- lowed by a recession and balance of payments difficulties. This pattern is related to programs that use the exchange rate as an instrument of disinflation. The Policy. Research. and Extemal Affairs Complex distributes PRE Working Papers to disscnmnatc the findings of work rn progress and to encourage the exchangc of ideas among Bank staff ard all others interested in developrnent Issues These papers carry the names of thc authors, rnflect only thcir views. and should he used and cited accordingly The findings, interpretauons, and conclusions are the authors own. They should not be aitobuted to the World Bank. its Board of Directors, its managemcnt, or any of its member countnes. Pollcy, Res.rch, and External Affairs ' _ 1 ~It 111 II MJacroeomnomic Adjustment and Growth WPS 513 This paper-- a product of the Macroeconomic and Growth Division, Country Economics Department- is part of a larger effort in PRE to examine stabilization policies. It was funded by the research project "Stopping High Inflation" (RPO 674-24). Plcase contact Emily Khine, room NI 1-061, extension 39361 (54 pages, including figures and tables). Kiguel and Liviatan studied the effects of business cycle that begins with a boom and ends disinflation on economic activity in "chronic with recession. (Stabilization programs that use inflation" countries based on a sample that the money-supply anchor tend to follow the includes major Latin American countries and usual Phillips curve relationship.) These pro- Israel. grams are associated with real appreciation, an increase in real wages, and a tendency to gener- Their purpose was to document the main ate a balance of payment crisis. Most of these features of the business-cycle phenomenon in features appear not only in failed stabilization countries following an exchangc-rate-based processes but also in those which tumed out to stabilization program, to understand its causes, be eventually successful, as in Chile or Israel. and to analyze their policy implications for future stabilization of this type. The authors relate the foregoing phenomena to recent theoretical modeling of stabilization Their main finding was that stabilization which are perceived, rightly or wrongly, as processcs in chronic inflation countries - most temporary. This brings in the issue of credibility of which use the exchange rate as the main in the stabilization process. The paper concludes nominal anchor - do not normally follow the with a discussion of the pros and cons of the usual Phillips curve tradeoff in the medium run. exchange-rate-bascd stabilization and of the desirability of switching nominal anchors in the Exchange-rate-based stabilization programs course of stabilization. in these countries are often associated with a The PRE Working Paper Series disseminatcs the findings of work under way in the Bank's Policy, Research, and Extemal AffairsComplex. Anobjectiveoftheseries is to getthesefimdings outquickly, even if presentations are less than fullypolished. The findings, interpretations, and conclusions in these papers do not necessarily represent official Bank policy. Produced by the PRE Dissemination Center THE BUSINESS CYCLE ASSOCIATED WITH EXCHANGE RATE BASED STABILIZATIONS TABLE OF CONTENTS Page Introduction 1 I. Stopping Low Inflation, Hyperinflation and Chronic Inflation 2 II. Empirical Characteristics of Stabilization Cycles 5 1. The sample of stabilization programs 5 2. Exchange rate and money based stabilizations 9 3. The main feature of ERBS's 11 a. Real activity 11 b. The Balance of payments 13 c. Relative prices 13 d. Consumption and investments 14 1II. Theoretical Aspects of the Expansionay Phase 15 1. Disinflation Under Alternative Regimes with Flexible Prices 16 2. Inertial Wage and Price Rigidities 17 3. More on the Expansionary Effect of the Real Interest Rate 20 4 Temporariness 23 5. Consumption Booms and Self Fulfilling Balance of Payments Crises 25 6. Real Wages as a Cause ror Expansion 26 7. Supply Side Effects IV. Specific Expansionary Factors 27 1. Favorable External Conditions 27 2. Development Strategy 28 3. Opening the Capital Market 29 4. Commercial Policies 30 V. The Downswing 30 1. Inflationary Rigidities in the Downswing 31 2. Reversal of the Fiscal Adjustment 32 3. External Shocks 32 4. Unsustainable Development Policies 33 VI. Policy Issues 33 We are grateful to Michael Bruno, Stanley Fischer, Vittorio Corbo and participants of the Macroeconomic Workshop at the World Bank for their useful comments and to Jariya Charoewattana for research assistance. INTRODUCTION This paper deals wit; the effects of disinflation on economic activity in "chronic inflation" countries (to use a term coined by Pazos (1972)). By this we mean countries with a long inflationary history above the rates in industrialized countries, where labor and capital markets are adjusted to function in the inflationary environment. Our sample is based on a number of Latin American countries, including the major ones and on Israel. Our main finding is that stabilization processes in chronic inflation countries do not normally follow the usual Phillips curve trade off in the medium run. Specifically, stabilization programs in these countries are often associated with a business cycle, beginning with a boom and ending with a recession. This finding relates to the programs which used the exchange rate as the main nominal anchor, to which we shall refer as "exchange rate based stabilization" (ERBS). The latter was in fact the dominant type among programs which had any significant impact on inflation in the countries in question. The limited evidence on other types of stabilization points to the usual Phillips curve relationship. The purpose of the paper is to document the main features of the business cycle phenomenon in ERBSs, to try to understand its causes and to derive some policy implications for future stabilizations of this type. The paper is organized as follows. We shall first try to obtain a better perspective for our study by referring briefly to relevant features of stabilizations in industrial low-inflation economies and in hyperinflationary episodes. We then turn to chronic inflation countries. After a brief description of our sample of stabilization programs we shall highlight the main stylized facts concerning the business cycles in these experiences. We shall 2 t'en discuss the differences, in theory and practice, between ERBSs and disinflation programs which use money as the nominal anchor (to which we shall refer as "money based stabilizations' - MBS). This will be followed by an attempt to explain the mechanisms which generated the business cycle in our sample of stabilization programs. The analysis will examine the factors which contributed to the booms on one hand and to the severity of the recessions on the other. We conclude with issLes related to the countercyclical policies. I. Stopping Low Inflation, Hyperinflation and Chronic Inflation Stabilization programs which are aimed at stopping inflation are usually conceived as involving an initial cost in terms of loss of output because of rigidities in past nominal contracts [as in Fischer (1988) and Taylor (1979)] or because of credibility problems. The costs of disinflation are therefore borne in its early stage, falling later as the link with the past is severed and credibility is restored. This "classical scenario', of an initial recession preceding resumption of normal activity, is indeed characteristic of stopping low or moderate inflations in industrial countries. The most well known examples of recent years are the stabilization policies in the U.K. and the U.S. in the early 1980's. This pattern is also consistent with the process of disinflation in France and Italy in the first half of the eighties. In the case of hyperinflations one may expect that stabilization costs should be relatively small for several reasons. First, in this case the rigidities originating from past nominal contracts become negligible because of the drastic shortening of their duration. Secondly, the credibility problems, which usually arise even when the fiscal adjustment is satisfactory, are also 3 diminished because agents realize that the inflationary process is explosive and after some point, and there is no alternative to immediate stabilization. Thirdly, in hyperinflation it is easy to identify the change of regime, which takes the form of stopping the finance of extremely large deficits by money creation. In view of latter considerations Sargent (1983) suggested, in his influential paper, that in these cases disinflation costs should be much lower than, say, in the U.S. Recent research suggests that the recessionary effects of stabilization in hyperinflations have been underestimated. Thus Wicker (1986) points out that there was a significant increase in unemployment in Poland, Hungary and Austria after the stabilization of hyperinflations in the early twenties. It took two to three years before unemployment returned to normal. The reasons seem to be related, in part, to the firing of public sector employees (as part of the fiscal adjustment) and to the process of adjustment to a stable-price environment. Even though these recessionary tendencies may have been smaller than in the low- inflation case, the classical scenario - of disinflation being followed by increase in unemployment over a number of years - continues to hold. For most hyperinflationary episodes no reliable data on output is available. The scanty evidence shows that in some cases output went through a growth cycle following stabilization. However this was associated with extremely low prestabilization levels of output, due to the dislocations caused by wars and their aftermath. For example, industrial output increased after the stabilization of the German hyperinflation in the end of 1923, but this followed the disruption of output as a result of events associated with the occupation of the Ruhr in the beginning of that year. In fact, German industrial output in 1924 was low not 4 only relative to the historical level of 1913 but also relative to the prestabilization years of 1921-22 [see data in Garber (1982)]. A similar phenomenon is associated with the Greek stabilization of '945-47 [Makinen (1987)]. One of the few cases where a full fledged hyperinflation emerged in peacetime was the recent Bolivian experience of 1982-85. In this case GDP per capita fell below the prestab!lization level, and remained there at least till 1989 (see Morales 1990), lending some support to the view that even in hyperinflations the stabilization process is associated with a fairly long initial recessionary phase in output. Examining stabilization programs in chronic inflation countries in Latin America, we found, as noted earlier, in most cases a rather different .cenario. After a small initial recessionary effect, or even with no effect of this kind, the reduction of inflation was associated withi an initial expansion of output above the historical trend, and with a drop in unemployment. The expansionary phase could go on for a number of years ending in a recession. It should be pointed out, however, that this pattern was characteristic of programs which made use of the exchange rate as anchor for disinflation (this category covers the major programs). The different patterns of disinflation in chronic inflation countries is probably related in part to the use of the exchange rate as anchor. However this cannot explain the emergence of a demand-driven business cycle unless it comes in conjunction with such factors as lack of credibility, insufficient fiscal support and the like (more on this later). The highly developed technology of living with inflation, which is characteristic of chronic inflation countries, 5 is one of the factors which make the programs less credible. This is because stabilization is not inevitable (unlike the case of hyperinflations). Another possible reason for the cyclical pattern is the tendency of governments in chronic inflation countries to use improvements in the external sector in order to pursue simultaneously expansionary and disinflationary policies. This tends to give rise to an unsustainable boom in economic activity. The emergence of the stabilization cycles raises important issues concerning offsetting policies. The fact that this empirical regularity has not been recognized in the past led to incorrect evaluation of actual development. For example, in the recent Israeli stabilization policy makers interpreted the expansionary phase of the cycle as change in the long term trend. As a result, the recessionary phase caught policy makers by surprise. If our findings have predictive value for future stabilizations then appropriate countercyclical measures can be planned to mitigate the unfavorable effect of excessive variability of output. II. EMPIRICAL CHARACTERISTICS OF STABILIZATION CYCLES 1. The Sample of Stabilization Programs The stabilization programs in our analysis refer only to the so-called "chronic inflation countries". The study concentrates on Latin America but includes also Israel whose c.conomy fits the chronic inflation category. In Latin America we deal with stabilization programs undertaken in Argentina, Brazil, Chile, Uruguay and Mexico. In each of these countries there were usually a large number of stabilization programs, but we include oniy the "major" ones (see characteristics of programs in Table 1). By this we mean programs which the public recognized as drastic new initiatives which constituted a break with 6 previous policies. A common feature of these programs is that all of them had major effects on the economy (for better or worse) and brought about a significant reduction in inflation for short or long time spans. In most cases the programs failed to stabilize inflation eventually (in which case inflation tended to accelerate) but in other cases the programs were part of a longer term stabilization effort over which inflation was kept at a low level. (See behavior of inflation and devaluation in all programs in Figure 1. Programs ave indicated by shaded areas.) To gain a historic perspective of the stabilization issue we extended our empirical analysis over a period covering the past three decades. IT. each decade there was a group of stabilization programs which shared some impo.tant common elements concerning the diagnosis of inflation and the design of the appropriate policies to deal with it. This is clearly seen in the stabilization policies of 1980's which include Argentina's Austral plan of 1985-86, the Brazilian Cruzado plan (1986), the Israeli 1985 plan and the Mexican Pact of Economic Solidarityl of 1988-89. All these programs were based on a shock treatment which took the form of a drastic stop to inflation supported by initial wage-price freezes. These programs were called Heterodox because of the strong income policy component, but they also used the exchange rate as a nominal anchor. In the successful experiments, those of Israel and Mexico, the exchange rate con,Lnued to be used as the stabilizing instrument even when prices were gradually flexibilized (Israel has been using step devaluations while Mexico adoptece recently a crawling peg). 1 See Heyman (1987), Kiguel (1989), Modiano (1988), Bruno and Piterman (1988), Liviatan (1988), Banco de Mexico 1988. 7 Contrary to the approach of the eighties, the philosophy of the Southern Cone Stabilization (in Chile, Argentina and U uguay) in the 1970's was an "orthodox" one, i.e. one that embraced the free market approach, discredited the use of price controls and favorea the liberalization of foreign trade and capital flows. These programs shared many common elements with regard to design and phasing, as aptly described by Ramos (1986). From the point of view of the present paper it is especially important to note that these programs evolved in two stages. The stage of stopping the accelerating inflation consisted of a fiscal-monetary package with an adaptable exchange rate (which -e called a "money based stabilization" or MBS), while the second stage was an ERBS. The latter stage, which was motivated to some extent by the slow pace of disinflation in the preceding one, begen in Chile in the second semester of 1976,2 in Argentina in the second semester of 1978 and in Uruguay in late 1978. In the advanced stage of the ERBS these policies took the form of a preannounced path of devaluations, commonly referred to as the Tablita3. As is well known, these policies ended in a severe crisis in the early 1980s and had tc be abandoned. Yet in a historical perspective the Chilean experience turned out to be a part of a successful long term disin.lationary process. In our sample te also have a group of three stabilization programs in the 1960's which again share a number of common elements. Here we refer to the Brazilian 1964-67 stabilization4 under the Costello Branco administration, the 2 In Chile, the first phase was a crawling peg with occasional revaluations. In the second (more advanced) stage the exchange rate was fixed in the last two years of the Tablita (Corbo (1985), p. 914). 3 On the Southern Cone stabilizations, see Ramos (1986), Corbo (1985) and Edwards (1987). 4 See Fishlow (1973), Simonsen ( ), Foxley (1980) 8 Krieger-Vasena stabilization in Argentina in 1967-705 and the Uruguay stabilization of 1968-716. In all of these cases the basic level of inflation was much lower than in the 1980's and so were the fiscal deficits. The programs could also benefit from a growing world economy and trade. The common elements were expressed by the fact that all three programs male use of the exchange rate as nominal anchor and used income-policies in varying degrees of intensity. (Argentina and Brazil relied mainly on voluntary price controls in contrast to Uruguay which adopted a heterodox shock treatment with comprehensive wage-price controls, similar to those of the eighties). While the Argentinean and Uruguayan programs were not sustained beyond 1970 and 1972 respectively, the Brazilian program was the prelude to a long period of high growth with low inflation (known as the "Braziliar Miracle")7. In addition to the ten programs mentioned above, our sample includes two adlitional Argentinean stabilizations. One is the Frondizi stabilization of 1959-62 which resembles those of the 1970's in two respects, namely being an "orthodox" program and having initially a stage of tight monetary policy (the first semester of 1959) that changed later to a fixed exchange rate policy which lasted until early 1962. We close the list of our sample by the Peronist stabilization of 1973-75 (See DiTella (1979)) which resembles in some ways the Brazilian Cruzado plan. Both programs used comprehensive wage-price-exchange- rate freezes which were n supported by a proper fiscal adjustment and are usually regarded as populist policies. 5 De Pablo (1974) 6 Finch (1974), Viana (1989) 7 See detailed analysis of these programs in Kiguel and Liviatan (1989). 9 We turn now to the characterization of the programs in terms of the policy instruments, the targets, and the real effects with which they were associated. 2. Exchange Rate and Honey Based Stabilizations. One of the basic features of stabilization-business-cycles is that they were associated with programs which used the exchange rate, rather than the money supply as the nominal anchor. While it is easy to identify the former empirically, the latter case is more elusive. One piece of evidence which we used for the comparison of the alternative disinflation strategies is related to the stabilization programs initiated in the Southern Cone by the military governments in the 1970s. As we noted earlier, the first stage of disinflation relied mainly on monetary and fiscal measures which were then switched to the exchange rate-fiscal package [see Ramos (1986) and Edwards (1987)]. The result of the first phase was recessionary for Chile and Argentina both in comparison with past trends and in relation with other Latin American countries (Table 1). In Uruguay this phase was expansionary; this seems to be related to the fact that here the main priority in stage I was not to stop inflation but rather to encourage exports by fiqnal and financial means (Ramos op. cit., p. 29) which may have stimulated output. Stage II was expansionary in all three coumtries by the above criteria. The recessionary phase of this policy (stage III in the table) coincided with a recession in other Latin American countries as a result of worsening external conditions. It is apparent however that the failure of the Tablita policies in Chile and Uruguay, where these wi._e applied more rigorously, caused a distinctly excessive recession. 10 In the course of stage I the three countries managed to get their external bal_ ce under control, but the situation deteriorated severely in stage II (as can be seen in table 1). Stage III represents the recession which accompanied :he balance of payments crisis at the termination of the Tablita policies.8 The effects of the nominal policies on economic activity in the two stages are not fully comparable because of two reasons. First, the major fiscal adjustments took place in stage I and their recessionary effects cannot be separated from Lhe monetary effects. Secondly, in stage I the economies in question had to deal with severe balance of payments problems (especially Chile, which had to adjust to a sharp fall in the price of copper in late 1974). These developments may have biased the comparison between the stages in the direction of showing a too large recessionary effect in MBS. However, we do not believe that this changes the main conclusion, namely that MBS tended to be recessionary while the ERBS tended to expansionary. A similar distinction between stages of monetary and exchange rate based policies emerged also in the Frondizi stabilization, where tight monetary policy was applied in the first half of 1959 leading to a recession and an improvement in the current account (see figure 2). In the ERBS, which took place from the second semester of 1959, output expanded above the historical trend, following the pattern of the seventies. 8 We must note that there was no close resemblance between stage I of the foregoing stabilizations and the classical monetary stabilization based on a fixed (low) money supply rule with a floating exchange rate. In practice, the rates of monetary growth were reduced in a very gradual manner without a preannounced rule (unlike the exchange rate stabilization phase). While there were some identifiable instances of tightening monetary policy, there was certainly no rigid use of money as an anchor. 11 3. The Main Feature of ERBS's a. Real activity In general, economic expansion started quite soon after the initiation of the stabilization programs (see Figures 2). In Argentina the growth of output is evident in all five stabilizations. In Chile, where the use of the exchange rate for stabilization purchases began as early as the second semester of 1976 (see Corbo (1985)) we find that the whole period of ERBS till 1982 was one of uninterrupted GDP growth. The upsurge of growth is also apparent in Uruguay after the stabilization of the exchange rate in 1979. The exper.ence of the eighties is generally quite similar in this respect. Israel enjoyed high rates of growth in the business sector in the first three years of the programs and similar, though shorter, growth spans were observed in the Austral and Cruzado plans. Usually the behavior of the unemployment was compatible with GDP growth, i.e., unemployment fell in the growth phase of the cycle (we do not record here this evidence for the sake of brevity). We should note a certain difference between orthodox and heterodox program in the initial stage of the ERBS. In the orthodox program the exchange rate policy was introduced when inflation was already on the decline, having been stopped initially by a monetary-fiscal package as in the Frondizi and Southern Cone stabilizations of the 70s. In these cases we do not observe any recessionary effects with the shift to a policy of reducing the rate of devaluation. On the other hand, in the heterodox stabilizations the introduction of the ERBS was in the context of stopping the inflationary acceleration. In a way, the income policies of the heterodox programs were the counterpart of the monetary measures which preceded the ERBS in the orthodox programs of the Southern Cone. This brought about an initial recessionary effect into the 12 heterodox programs. However, as can be seen in Figure 2, the recessionary effects were both small and short-lived. When the period of exchange rate stabilization extended over a considereble span we observe that the recessionary phase started before the large maxi- devaluations set in. This was the case in the Southern Cone stabilizations of the 70s, as well as in Uruguay 1969 and in Israel. In order to obtain a better understanding of the cycle it is useful to relate it to the long term trend. Accordingly, we present in figure 3 the cycles in terms of deviations from the long term evolution of GDP per capita.9 These diagrams confirm that almost all of the cycles can be characterized as such even with respect to the long term trend. In this respect the expansions in chronic inflation countries differ from those which are sometimes observed in post- hyperinflations, as in the case of Germany where industrial output remained well below trend (see Garber op. cit.). It may be pointed out that while the cycles may have influenced the trend, as calculated in our study, this interaction was minimized by taking relatively long time intervals. Note also that most of the ERBS's were preceded by a recessionary period relative to trend. This indicates the existence of excess capacity which may have provided suitable conditions, from the supply side, for the upswing. One exception deserves special attention. The Brazilian stabilization in 1964- 67 was characterized by a continuous recession relative to trend. This may be a significant fact in explaining the sustained low level of inflation in the following ("miracle") years. We may also note that the Krieger Vasena 9 To compute the trend we fitted a linear or quadratic equation for log GDP per capita in a piecewise manner and appropriate intervals. In the case of Argentina there is overlapping in the periods used to calculate the trend. We then averaged the residuals from the overlapping parts. 13 stabilization, which was one of the more successful Argentinean attempts, maintained GDP below trend for the first two years and only the last two years gave way to the boom. b. The Balance of payments It is characteristic of all ERBSs that they were associated with a deterioration of the trade balance in the course of the program. Therefore the expansionary feature of these programs, from the point of view of domestic uses, was even more pronounced than with the output growth criterion. The normal case (see figure 2) is that in the expansionary phase the current account goes into the red. The capital inflows which financed these deficits were, as a rule, reversed at some advanced stage of the boom where the recessionary phase began It was the inability to finance the growing current account deficits which was, in most cases, the immediate reason for halting the boom. There are two important exceptions, in different directions, to this statement. In the case of Brazil 1964-67 the capital inflows continued to finance the current account deficit and made growth sustainable for many years to come. On the other hand, in the case of Israel the boom was halted without a deterioration of the current account. c. Relative prices As a rule, real wages increased with the upswing of economic activity (see figure 4), but sometimes we observe a lag which is due to two reasons. The real wage may have been raised up front in order to take account of the anticipated erosion by the sluggish reduction in inflation. We then observe a temporary reduction in the real wage in the early phase of stabilization (as was the case 14 in the Krieger Vasena stabilization). Or it may be the case that the real wage was kept deliberately, for some time, below its equilibrium level by income policies (as was the case in Israel). The normal behavior of the real exchange rate during the boom was (as expected) in the opposite direction to that of the real wage. It is especially during the periods of the full peg that the real exchange rate fell quickly. d. Consumption and investment Most of the expansions of output were accompanied by a "consumption boom". Clearly, when GDP grows faster we also expect consumption to follow suit. The latter is expected to lag behind output if the stimulus to growth does not originate from the consumption side. By a 'consumption boom' we mean that consumption grows faster than GDP when the latter accelerates (or is above normal). The most conspicuous episodes of the consumption boom took place in the Peronist and Martinez de Hoz stabilizations in Argentina, Uruguay 1969 and the Israeli program (figure 5). Investment played a dominant role in the Argentinean program of the sixties, much of it being directly induced by government policies. In the programs of the seventies it was the Chilean ERBS which was driven by a continuous investment boom. The role of investment was not significant in the eighties. This was partly related to the reduction in capital inflows following the debt crisis. In Israel we observe a short-lived upsurge in investment, but on the whole the investment-GDP ratio was lower after the stabilization. 15 e. The fiscal deficit Normally the stabilization cycle appears in spite of a sharp reduction in the fiscal deficit (see figures 1). This is perhaps most clearly evident in the case of Israel where the elimination of the fiscal deficit in 1986 coincided with a sharp consumption boom. This may seem rather surprising since the increase in taxation clearly outweighed any possible reduction in the inflation tax. A similar phenomenon was observed in Chile where the fiscal deficit was turned into a surplus in the course of the ERBS. The cut in the fiscal deficit prior to, or along with, the expansion in aggregate demand during the early phase of stabilization is also characteristic of all Argentine programs (except for the Peronist one where the deficit increased from the start). Although the recessionary phase of the cycle involved typically an increase in the fiscal deficit yet if this increase was perceived as being endogenous to the recession it did not entail the rekindling of inflationary expectations (see Figures 9 and 12 for Chile and Israel). III. THEORETICAL ASPECTS OF THE EXPANSIONARY PHASE The questions which are raised by the foregoing stylized facts are the following: What is the explanation of the clear tendency of the ERBSs to be expansionary? What explains the contrast between these stabilizations and those based on money as the anchor, which turned out to be recessionary? Is ERBS expansionary because it is correlated with other policies which are expansionary? Or is it because ERBSs are correlated with external conditions which are conducive to expansion? We shall first deal with these questions before turning to the issues which relate the recessionary phase with the balance of payments crises. Let us begin with some theoretical considerations. 16 1. Disinflation Under Alternative Regimes With Flexible Prices In the theoretical models of ERBSs we assume that the central bank stabilizes the exchange rate by intervening in the foreign exchange market, i.e. by manipulating its international reserves. This is not allowed iis the MBS, where the exchange is floating. Now is there any reason to expect that in theory an ERBS will have initial expansionary effects on consumption? Let us first consider this question in the context of flexible prices. In addition, in order to focus solely on the exchange rate policy let us abstract from the fiscal aspect, assuming that taxes are lump sum and fully accommodative to the disinflation policy10. This in line with the approach taken by Obstfeld (1985) and Calvo (1986) who analyze disinflation by means of exchange rate policy in a Ricardian model. This analysis assumes that the central bank's operations are fully internalized by the private sector. Obstfeld shows that in this framework a reduction in the rate of devaluation from one constant level to another is neutral with respect to consumption and the current account. Real money balances will increase immediately through a sale of foreign assets to the central bank, but the increase in central bank's reserves will not affect consumption possibilities since the real asset position of the economy as a whole did not change. It may be noted that if we use this model to perform a similar disinflation by means of reducing the rate of growth of the money supply we will obtain the same kind of result. The economy can jump immediately from a high inflation to 10 In a Ricardian model it is only the discounted value of the stream of taxes that matters. 17 a low inflation steady state in a neutral fashion with real balances increasing through our initial drop in prices. In non-Ricardian models of finite horizon (unlike the foregoing models of infinite horizon) the results may be quite different. Thus, Helpman and Razin (1987) show that in the context of an overlapping generations model of the Blanchard (1985) type, the consequences of exchange rate management are likely to be different as compared with a pure float. In their model, variation in taxation will be neutral (as in the Ricardian model) under a pure float, while under exchange rate management this will not necessarily be the case. In particular, an unexpected freeze of the exchange rate combined with a tax cut may be expansionary. This will happen if the freeze creates a windfall for the currently living generation, which is not fully taxed away. While this model is based on very special assumptions (e.g. money is not a store of value, so that portfolio considerations are ruled out) it does suggest that the disinflation under the two types of regimes may indeed be basically different. It should be pointed out, however, that this model does not provide a convincing explanation for the experiences of Israel where the consumption boom arose in conjunction with a fiscal surplus. It may provide however a possible explanation for consumption booms which appeared in programs where the fiscal adjustment was not sufficient to sustain the devaluation policy on a long term basis. 2. Inertial Wage and Price Rigidities Wage or price rigidities may provide another setting in which disinflation under alternative regimes may yield differences in the direction suggested by the stylized facts. For example, we can see intuitively that when prices exhibit downward rigidity the increase in real money balances in the MBS cannot take 18 place through a fall in prices and therefore it is output that will tend to fall.11 This factor does not exist in an ERBS where the downward rigidity constraint is not binding. Although this argument does not explain why there is a tendency for ERBS to be expansionary, it shows that the MBS is more recessionary. In pursuing this approach we can make use of recent theoretical studies by Fischer [(1986) and (1988)] who analyzed the effects of disinflation in alternative exchange rate regimes under wage rigidities which result from long term nominal contracts. Fischer formulates a fairly standard macro model of the open economy with rational expectations and full capital mobility (the interest rate parity holds), a downward sloping demand curve for exports and a 'small economy' assumption with regard to imports. The longeEt wage contract is for two periods in the course of which a successful disinflation assumed to be completed. Disinflation by means of the money supply tends to generate recessionary influences through an increase in real wages due to nominal wage rigidity (which reduces supply) and through the creation of excess demand for money which pushes up the real interest rate and thup reduces aggregate demand. An increase in the real interest rate above the international level, under perfect capital mobility, is possible only if a real devaluation is expected, which in turn requires an initial real appreciation, since the real exchange rate has to return eventually to its original level (as in Dornbusch's overshooting theory). This real appreciation exerts an additional recessionary effect through the demand for llThis is in fact confirmed in a recent model by Calvo and Vegh (1990) where (symmetrical) nominal rigidity is introduced through a model of staggered prires. 19 domestic output. The effect on the trade balance is ambiguous because of the conflicting i;fluences of the reduction in output and the real appreciation. In comparing these conclusions with the 'monetary phase' of the Southern Cone stabilizations (as well as with other monetary-fiscal stabilizations in Latin America) we find indeed that the overall effect is r.Bcessionary, but we do not find the tendency for real appreciation.12 We also find that the effect of the MBS on the trade balance was favorable. A possible explanation for these contradictions is that the periods in which this type of stabilization was undertaken in the Southern Cone were ones of much political and economic instability which prevented effective capital inflows. In the absence of capital flows (such that the current account is a residual accommodated by changes in reserves) a tight money policy can be consistent with a real depreciation and an improvement in the current account if the exchange rate policy is of the form of a passive crawling peg (with lags). For the case of an EkBS in Fischer's type of analysis, the recessionary effe : through excess demand for money is essentially inoperative since money is endogenous. However the real appreciation is still there because domestic prices are stickier than the exchange rate at the starting point. Real wages for domestic producers can also be expected to go up because nominal wages are stickier than prices. In contrast to th.se recessionary tendencies there is an initial expansionary effect through the possible reduction in the real interest rate in the first period. This is due to the real appreciation in the second period, which is foreseen correctly in the first one. Given the interest rate parity this implies a reduction in the real interest rate. In spite of the 12 In the case of Argentina the economy started with an undervalued currency, which may explain lack of further real depreciation in 1976. 20 theoretical possibility of a boom in the first period, Fischer dismisses this outcome as unlikely on the basis of some numerical examples. The effect of ERBS on the trade balance is again ambiguous because of opposing forces. Fischer's results concerning the real appreciation ard the implied rise in real wages in an ERBS are certainly consistent with the stylized facts presented earlier. However, in the real-world ERBSs, there is clearly no ambiguity about the deterioration of the trade account in the course of the stabilizations. More importantly, the early part of these stabilizations is almost always expansionary, contrary to Fischer's examples. If we remain in the context of his model13 we have to conclude that the initial expansionary effect of the real interest rate outweighs the recessionary effect of the real appreciation. 3. More on the Expansionary Effect of the Real Interest Rate The possibility that the real interest rate may create a boom in the ERBS comes out nore clearly in the model developed by Rodriguez (1982). This model is based directly on rigidities in inflationary expectations in the sector of non-tridables. With full capital mobility the formula for the real interest (r) rate is given by r =i e= i+ B(ee _ e) + k (1) 13 We should also note that the actual programs are not directly comparable with the model because the latter assumes that stabilization is successful, which is usually not the case in practice. 21 where i is the nominal domestic interest rate, ire is the expected rate of inflation, i* the foreign interest rate, 3 the weight of non-tradables in the e e price index, e the expected rate of devaluation, N the expected rate of inflation in non-tradables and k is a constant risk factor. Rodriguez assumes that actual devaluation e equals fe and that e exhibits rigidity. It then follows that a reduction in E will reduce r and thus cause an expansion of aggregate demand. In the framework of continuous time the level of the real exchange will not change on impact while r will. Therefore the initial effect of an ERBS is expansionary. The recessionary effect of the real appreciation on the demand for non-tradables gathers strength gradually and eventually outweighs the expansionary effect of the real interest rate. Eventually the real exchange and interest rates return to their long-run equilibrium levels. While in the Rodriguez model aggregate output is assumed to be constant we may, in principle, think that domestic output depends negatively on the real interest rate and positively on the real exchange rate. In this modified version there will be an output cycle, with an initial boom, and a real exchange rate cycle with an initial appreciation. The foregoing model can be criticized on several grounds. First, it can be claimed that this model, as well as Fischer's, assumes full credibility in the government's devaluation policy, which is unrealistic. We must distinguish, however, between credibility in the early and later stages. The fact is that the announcement of a reduction of the rate of devaluation is usually credible in the short run, and this is strengthened by capital inflows which augment the 22 central bank's reserves. This is sufficient to create an expenditure boom. The issue of credibility in the announced devaluation rate appears later, and we shall deal with it subsequently. Another criticism is that the model is based on adaptive expectations which are not very fashionable recently. However, one can show that the insight provided by Rodriguez concerning the boom can be preserved in rational expectations models of similar kind. What is the empirical evidence on the behavior of real interest rates in ERBSs? It seems that in the case of the Southern Cone stabilizations in the late 70s the reduction in the real interest rates was quite evident. Thus, Corbo (1985) reports that the Tablita policy in Chile, and the increased capital mobility with which it was associated, led to a downward pressure on domestic interest rates which stimulated a rise in aggregate demand. Similar findings for the early stage of the Tablita policies are reported in Ramos (1986) for lending rates14 in all Southern Cone experiments (see table 3). However, this property was not shared by the stabilization programs in the 1980s partly because of limited capital flows as a result of the debt crisis. Real interest rates in Israel and Mexico rose to extremely high levels in the course of stabilization. This may be related to the lower degree of credibility in these programs due to the sharp reduction of inflation with the aid of controls. The rise in the ex-ante real rates was smaller but apparently still significant. It seems therefore that in these cases we need something more than the Rodriguez mechanism to explain the expansion. The next section explores one of the possibilities. 14 The picture for deposit rates is less clear, see Ramos op.cit., p. 154. 23 4. Temporariness The foregoing models of Fischer and Rodriguez assume that the program is eventually successful. However, the fact that so many stabilization programs failed must lead to pessimistic views about the chances of a new program to succeed. This is equally true for a program which turns out eventually to be part of a successful disinflation, as in the case of Chile or Israel. However, the very expectation that the stabilization is only temporary may give rise, in the early stages, to an expansion of aggregate demand. The issue of expectations that stabilization is temporary has been investigated in various recent papers by Calvo (1986, 1987, 1989). In these models, which are based on a cash in advance setting, it is shown that when agents expect stabilization to be temporary they will shift part of their future consumption expenditures to the present. The reason is that in the present, when the rates of devaluation and inflation are low, the cost of holding money (which is necessary to carry out expenditures) is also low, while the opposite is true for the future periods when inflation is expected to be resumed. This will give rise to increased expenditures in the stabilization period, accompanied by current account deficits and real appreciation. All these features are clearly consistent with the phenomenon of the consumption boom and the related developments which we described earlier. It is interesting to note that this model is a Ricardian one, with the property that a permanent reduction in the (constant) rate of devaluation is neutral. This underscores the fact that the consumption boom is related entirely to expectations of temporariness. It may also be noted that unlike the Rodriguez 24 and Fischer models, where the boom is the result of an initial reduction in the real interest rate, the rise in consumption in Calvo's model is caused by a temporary reduction in the nominal interest rate. This helps to explain the emergence of the consumption boom in programs where the real interest was very high (as in the case of israel). We may also point out that with fully flexible prices, the Calvo (1986) model of temporary stabilization will lead to an early consumption boom even under a MBS.15 However this requires an initial drop in prices. Consequently, with downward price rigidity the expansionary effect may not be possible. This problem does not arise with an ERBS since nominal money is endogenous. Consequently the expansionary effe_. remains.16 Somewhat paradoxically, one can arrive at similar conclusions with regard to the consumption boom if one assumes that (a) consumers view the stabilization as permanent, and (b) that the reduced uncertainty about relative prices and about government policies will enhance productivity. This sort of expectations may raise the perceived permanent income and thus raise consumption. (Note, however, that on this interpretation the increase in consumption is not cyclical.) A partial test for the competing hypotheses is by looking at the behavior of durable goods purchases. If agents expect the stabilization to fail then they may consider the possibility that the failure will involve a balance of payments crisis which will be accompanied by quantitative restrictions on imports and a 15 This is shown by Calvo (1989) in the framework of a more general model. 16In a more recent paper Calvo and Vegh (op. cit.) show that with staggered prices an ERBS is expansionary while a HBS is recessionary in the context of temporary stabilization. 25 general tightening of credit conditions. They would therefore shift the purchase date of durables to the prtsent. A perceived increase in permanent income may also give rise to a more-than-proportionate increase in durables purchases, because of the accelerator effect, but this can be expected to be lower than the intertemporal substitution effect. An examination of tho data for Israel reveals that durable purchases increased tremendously in 1986, following the stabilization of July 1985 (Table 4) which lends some support to the temporariness hypothesis. It is interesting to note that a similar behavior was recorded in Israel in 1981-83 when the prices of durables were reduced temporarily through cuts in sales taxes and through a reduction in the rate of devaluation (in the Tablita fashion). 5. Consumption Booms and Self Fulfilling Balance of Payments Crises The foregoing discussion can be related to the theory of rational and self-fulfilling balance of payments crisis, as in Obstfeld (1986). Pessimistic views about the government's policy in the event of a crisis may actually bring it about even if it is completely unrelated to the behavior of the fundamentals under full credibility. In particular, if the public's perception is that an exchange rate collapse will set off an inflationary domestic credit policy (which is not unrealistic) then the crisis may become self-fulfilling. If agents expect that a balance of payments crisis will involve restrictions on expenditures, in the fashion described above, then the anticipated self-fulfilling crisis may be preceded by a consumption boom. This consideration provides another possible link between confidence in the government's commitment to disinflate and preemptive increases in expenditures. 26 6. Real Wages as a Cause for Expansion Since real wages tend to rise with the expenditure cycle it is conceivable that the former may actually cause the latter. This is because of the higher propensity to spend out of wage income. However, this theory has to deal with two questions. First, it has to show that real wages affect demand more strongly than supply. Secondly, it has to explain what is it that causes wages to rise in ERBS more than otherwise. The answer to the first question is certainly unclear from the theoretical point of view.17 As for the second one, it is often mentioned (especially in the case of the Chilean Tablita) that lagged wage indexation will cause a rise in real wages when inflation is falling. It should be noted however, that this explanation does not work in the case of the heterodox programs where the foregoing type of inertia is eliminated at the outset. It can also be the case that in various stages of the cycle the role of wages may change. Thus for example, Bruno and Piterman (1988) point out that in the early stage of the Israeli expansionary phase real wages rose (after being initially suppressed) when unemployment was still r latively high, which supports the theory of an expansionary wage effect. However, quite soon the rise in real wages became endogenous to the expansionary consumption-pull forces. 7. Supply Side Effects Apart from the effects of disinflation on demand there may be expansionary effects originating from the supply side. The strong effect of exchange rate 17 This is closely related to the question of whether a real appreciation is expansionary [see Krugmnan and Taylor (1978) and Lizondo and Montiel (1989)]. 27 stabilization on prices, which we often find in ERBSs, may increase efficiency through the reduction of excessive variation in relative prices and through a shifting of resources out of excessive financial and speculative activities. However, the latter effect operates only in the longer run. In the medium run, the effect of restructuring the economy toward a low-inflation environment may well be recessionary [see Garber (1982) for an example from the German stabilization]. IV. SPECIFIC EXPANSIONARY FACTORS The forgoing analysis dealt with some general considerations which may explain expansionary tendencies in ERBSs. However in practice one may usually find specific factors which contributed to the expansion of output in individual cycles. It is conceivable that these factors were no less important (or even more important) in generating the booms than the exchange rate policy itself. In some other cases it was the interaction of the exchange rate stabilization strategy with other factors which created a mechanism for unsustainable expansion. Since this study involves a concrete set of programs we have to take into account these additional considerations. 1. Favorable External Conditions A common feature of many ERBSs is that they started from a relatively favorable external position. This could be due to an improvement in terms of trade (as in the Peronist stabilization), to a favorable change in external financing (as in the case of Israel), but mostly it was a reOalt of prior efforts to deal with balance of payments stresses (usually through recessionary policies). The latter type of development is evident in the 1980s in the cases 28 of Brazil and Mexico following the debt crisis, but it also took place in Israel. In the 1970s the use of the exchange rate for stabilization in the Southern Cone began only after the preceding external crises were brought under control (Chile had a current account surplus in 1976 and Argentina had surpluses in 1976-78). The Frondizi stabilization provides yet another example of this kind. On the other hand, we never observe that an ERBS began at a state where the balance of payments was facing severe difficulties.' The fact that ERBSs often take place under relatively favorable external conditions, following a recessiona-y period, suggest the possibility that the governments would have tended, under these circumstances, to follow expansionary policies even in the absence of the ERBSs. It is also conceivable that in some cases, the ERBS was chosen because it was thought to be conducive to economic expansion. It is for this reason that we cannot say that the cyclical developments are due entirely to the choice of the nominal anchor. However, the emergence of consumption booms in most episodes provides indirect evidence on the significance of the expectational mechanism of the Calvo-type theories. 2. Development Strategy It is usually the case that disinflation is part of a broader strategy which may involve expansionary elements. In some cases these may dominate the contractionary policies, leading to an expansionary stage in the disinflation progrdm. Examples of this kind are the Frondizi and Krieger Vasena stabilizations in Argentina. In both cases the government considered the modernization of the economy through investment as a dominant objective. Thus Petrecolla (1989) writes that the Frondizi policy of reducing inflation was part of a strategy to accelerate growth through a substantial increase in investment. 29 The reduction of inflation and the exchange rate policy were considered as necessary in creating a favorable atmosphere for attracting foreign investors which were also granted special incentives. The direct and indirect encouragement of investment jointly with exchange rate stabilization were also part of the Vasena program. These considerations go a long way in explaining the joint occurrence of disinflation and expansion in these two programs. However, the liberalization of the exchange rate and the reduced cost of borrowing abroad was an additional factor which encouraged investment (Petrecolla op.cit., p. 118). Thus the Rodriguez effect seemed to work simultaneousl with more direct expansionary forces in a way which is difficult to disentangle empirically. 3. Opening The Capital Market The opening of the economy to foreign capital was an integral part of the reforms in the Southern Cone stabilizations. This was not only by the need to attract foreign capital but was also part of the free market philosophy which dominated these programs. The removal of barriers to capital flows can be considered as a relaxation of liquidity constraints which may stimulate expenditures directly, or as an implicit reduction in foreign interest rates (see discussion in Edwards (1987) and Corbo (1985)). If we adopt the latter interpretations and incorporate it in a Rodriguez (1982) type model we find again that it leads to a reduction in the domestic real interest rate and therefore to an overall expansionary tendency. While the reduction in the foreign interest rate is not equivalent to a reduction in the rate of devaluation, yet it generates a similar cyclical tendency. Again, it is difficult to separate 30 empirically the expansionary initial effect of these two aspects of the Southern Cone stabilizations. 4. Commercial Policies The Tablita policies in the Southern Cone were accompanied by policies of trade liberalization (Ramos (1986), Ch. 7]. Although this was in line with the overall strategy of reforms, the timing of the tariff reductions was intended to support the disinflationary exchange rate policy. It is quite clear that this trade policy contributed to the increase in imports and to the increase in the external deficit. But could it have also contributed to the upswing of the business cycle? Normally a reduction in tariffs will have a recessionary effect on output in the short run because of substitution effects. However, if the resulting worsening of the trade balance creates pessimistic expectations about the fate of the stabilization program as a whole then the result may well be a temporary rise in aggregate demand (in anticipation of a tighter financial regime in the future). V. THE DOWNSWING If we think of the business cycle in terms of the above models of Rodriguez or Calvo, then the downswing is just the counterpart of the upswing and therefore does not require any special analysis. We shall argue, however, that there are important asymmetries between these two phases. In particular, while the downward pressure on the real exchange rate during the upswing can be easily accommodated by an excess of inflation over announced devaluation, the reverse process may be hampered by inflationary rigidities which result from credibility 31 considerations. The latter may render the downswing to be much more severe than otherwise. The foregoing approach to the cycle refers to the expectational aspect assuming the "fundamentals" are in order. We need, however, to examine to what extent was the downswing influenced by a retreat from the announced fiscal policies which may involve a loss of credibility. We should also recall that some expansions were influenced by policies designed to encourage investment. The downturn may then be explained in part by the unsustainability of these policies. We also have to take into account adverse external shocks. 1. Inflationary Rigidities in the Downswing The Rodriguez model describes the variation in the real exchange rate and in the real interest rate as a cycle in which the reduction in the nominal rate of devaluation is permanent and fully credible whereas the expected rate of inflation (of nontradables) is gradual, as a result of rigidities. Since the early stage of the process involves a real appreciation, the later stage requires a real devaluation (given the long run neutrality of the real exchange rate). However, this scenario is quite problematic. Consider for example a complete freeze of the nominal exchange rate. Then the real devaluation will require an actual deflation. However, since we are dealing with economies that have experienced inflation for many years this path will be viewed with much skepticism. As the real exchange rate continues to appreciate the public will attach an increasing probability that the overvaluation will be corrected by a change in exchange rate policy rather than by a domestic deflation (or a sharp cut in inflation). 32 With long term nominal contracts the expactation of future devaluations will introduce a downward rigidity in domestic inflation which may prevent the convergence to a low inflation equilibrium within the framework of the announced policy. This will be accompanied by a continued real appreciation and rise in real interest rates which may lead to a crisis, as we observed in the Tablita policies in the Southern Cone. 2. Reversal of the Fiscal Adjustment It is often the case that the main reason for the abandonment of the low devaluation regime in ERBS is the reversal of the initial fiscal policies which were supposed to support the exchange rate regime. Thus in all Argentinean programs we find that the abandonment of the exchange rate stabilization is associated with a retreat from the fiscal objectives (in the Peronist regime there wa3 even no initial fiscal adjustment). In these cases there is often a lag between the fiscal reversal and the change in the exchange rate policy, since there is a natural tendency to postpone the admission of the failure of stabilization (the lag is evident for example in the Argentinean Tablita, as can be seen in Figure 8b). Clearly, the longer this lag the more severe will the recession tend to be. 3. External Shocks In some stabilizations the downswing was aggravated by adverse external shock. For example, in the Southern Cone stabilizations, the downturn coincided with an increase in oil prices, rising world interest rates and a tightening of the world credit markets. This may explain why these stabilizations ended in 33 such explosive crises in the early 1980s. However, the difficulties in pursuing the Tablita policies became evident much before the external shocks. 4. Unsustainable Development Policies The implication of the Rodriguez model is that the investment boom is reversed because in the expansionary phase the real interest rate is below normal, a divergence which must be corrected later. However, there might have also been some basic difficulties, at least in Argentina, with the investment induced growth spans. In reviewing the stop-go policies in Argentina in the post war era, including the Krieger Vasena program Schydlowski writes: "Rapid in.ernal expansion typically overwhelmed the slow process of import substitution and thus the demand for imports shot ahead of the availability of foreign exchange from the more slowly growing exports.... Short term borrowing could cover the gap for a limited period of time, but ultimately proved unsustainable. At that point, expansion would not continue, devaluation took place and the economy entered into recession in order to ... build up foreign exchange reserves once more". (op. cit., p. 176). Thus the internally inconsistent growth pattern may have interacted with the exchange rate policy in bringing about the recession. VI. POLICY ISSUES The phenomenon of the business cycle associated with ERBSs does not in itself imply that the long term disinflation policy cannot persist. This has been shown in the cases of Chile and Israel. However, even in these cases the variation in economic activity and in consumption over time is undesirable for several reasons. 34 First, it is generally preferable to have a stable path of consumption [see Calvo (1986)]. Secondly, the excessive purchases of capital goods which take piace during the expansionary phase (in anticipation of a failure of the exchange rate policy) lead to an inefficient allocation of investment. Thirdly, the difficulty in correcting the overvaluation and redressing the excessive real wages exacerbates the recessionary phase and leads to an unnecessary loss of output. In the case of programs which turn out to be temporary (this is the majority) there are additional considerations. In these cases the failure can also be reflected in a destabilization of the inflationary process, as was clearly the case in the aftermath of the Austral and Cruzado plans. The loss of credibility which results from failure to stabilize requires much more recessionary policies in future stabilizations and corresponding losses of output. This raises two questions: Is the stabilization cycle unavoidable in practice? If not, what can be done (and what was done) to mitigate its effect? As for the first question, the evidence from the stabilizations of Brazil 1964- 67 and Mexico 1988-89 show that the excessive expansion can be avoided. One possible explanation for the Mexican case is that the fiscal adjustment was carried out long before 1988. In fact, the fiscal deficit was cut very drastically as early as 1983 and the budget even showed an operational surplus in 1987. This may indicate that it is advisable to start with the fiscal adjustment before the stabilization of the exchange rate in order to enhance credibility in the program. It must be recognized, however, that this may not be feasible politically (in the case of Mexico this step-wise procedure was 35 facilitated by the need to use recessionary fiscal measures to deal with the balance of payments crisis).18 Thus far we focused on policies which may prevent excessive expansion in stabilization programs. However assuming that normally some form of overvaluation will tend to arise in the ERBS one should look for ways of overcoming this obstacle which causes so much difficulties. An obvious question is whether one should not switch nominal anchors - shifting at some stage from ERBS to MBS - thus benefitting from the advantages of both strategies. The ERBS is useful in the early stage of stopping inflation (in the framework of a heterodox package) because it enables to clear the inflationary confusion and provides a simple instrument by which the nominal policy can be monitored by the public. The initial fixed exchange rate regime provides also a simple framework for a stock adjustment of money without raising credibility problems. Switching to the monetary anchor some time after the completion of the stock adjustment may seem to be a reasonable way to avoid the subsequent problems arising from exchange rate rigidities. Indeed, Chile did quite well after abandoning the fixed exchange rate regime in 1982 - economic growth was resumed jointly with a real devaluation and a stable level of low inflation. Israel, on the other hand, continues with a policy of infrequent step devaluations, relying on the exchange rate as nominal anchor, and going through a recession. There are however two difficulties with the proposed switch of anchors. If the excessive real appreciation in the ERBS is due to lack of credibility in 18It should be pointed out, however, that the Mexican experiment is still very young and we have to wait a few more years before reaching more definite conclusions. 36 the adherence to the nominal anchor then these credibility issues will reappear in connection with the money supply rule as well. Secondly, the adoption of the money supply policy is problematic in disinflation if the economy remains highly indexed, as in the case in Israel. In this regime, monetary shocks are translated very easily to price shocks which may undermine the credibility in price stability (given incomplete information about the causes of the shocks). Chile overcame this difficulty by abolishing formal wage indexation, a decision which was facilitated by the balance of payments crisis of 1982. By contrast, in Israel, the comfortable external position continues to support the reliance on the exchange rate as anchor. Table 1. O,srsctaat;ics of St"i I;t%; Pr l"ald ; . Eucl;ange In. t; a I If atI. o" Progrem Rat. R*sor.** Reduction i. Precod.d by .anto (Anerage 12 Precedwid Tore or when did it Pined as. Income Multiple (months of Inflation, Commercial #loetery Sh%ock or MiotO. prior by lb1.. - thister finish? CreelI Pol.cies or U.nf; ad Fiscal laporta) Fro To Po i Cy F.".ca M.-Ow. C-adue1 to prom,..) Decaluait- Israel Not yt Fid sod Y-- Official f; ip 3.2 21.2 * I No Special No 327 7 Yun 3rd Q. 65 infrequent (ehock) and initial adjustments parallel adjustment Austral 3rd Q. U6 Fi.od Yoe Official largo 5.3 24.9 2.6 No No Cradual 1082 4 Yeo 3d Q. 03 (shock) an1ld transitory pralll adjustment Crusado 4th Q 66 Fined Ye official no 10.4 11.1 1 7 No NO Shock 237.2 No lot Q. U4 (ehok) and adju*tment parallel (lerpg praom u-) Monico Not yet Fined (lot Yoe NO YeT. Main 12.4 8.2 2.6 Trade A F,ecal Not let 131 8 Y-s lot Q. of yqarj thon =S" I I ~~~Adjustment Capcita 1j0on let 9. 66 ye:.1~~Cro thn :i Prior to AccopntalAjem Program Liberal- i jati on Chile 3rid Q. 2 Crewl, thon NO Unified Yen 2.6 11.2 6.5 TrAdad Yoe Shock 249.37 YTo 3rd Q. 76 Preennounced Capital then Fined Account Liberalized Uruguay 4th Q. 62 Proannounced No Unified Yes 5.9 3.4 4.6 Libo,al.xiid Preceded by Shock 42 3 No 4th Q. 78 Trade end SmellI Fiscal Capital Aejuetisent Accounts Argentine let Q. I1 Preannouncod No Unifild luod ate 16.7 8.1 6.6 Yes Yon Shock 160 7 No 4th Q. 7S Stable sudgint Deficit Argentina 2nd Q. 75 Fined Yeo Three E.pneionary 3.5 5.7 0.8 No No Shock 75 4 No 3rd Q. 73 Enchang. Rot Argentin 3Srd Q. 70 Fined Yoe Unifiod Fiscal 1.9 2.5 2.7 Incenti,we for No Cradual 27 4 Yun 2nd Q. 67 (Oreduel) Eachango Adjustment capital inflame Rote 2rnail 3rld Q. 6t FPoed */ Yoe Official Fiscal 0.9 6.4 4.2 No NO Cradual and 96 3 YTw 2nd Q. 64stop (Gradual) adAdjustment succoessful Devaluation Paralll Uruguay lot Q. 72 neaad Yos Officibl Fiscal 4.1 9.5 1.Y No Yoe, C anntha Shock 163 C. Yn 2ndl . 6O (Shock) end preced#d earl er Parallel deterioration later on ist Argentine 2nd Q. 62 Fined No Lnified Initial 5.7 9.5 1.9 Incentins for Yoe (hf Cradual 136 1 Yo- 3rd Q. 59 Eschange edjuetment Foreign Program Reta deteriorated In,estment a monthe lst*r on before * A shock usually includee O si-ultoneou* froox* of magma. prices and the enchange rats. 38 Table 2. Stages in Southern Cone Disinflation (1) (2) (3) (4) (5) (6) (7) Current GDP Growth Account M1 Stage Dates per Capita Export ratio Growth Inflation Daaitikn Chile Historic 1950-73 1.5 I 74-76 -4.6 -.12 257 370 435 II 77-81 6.2 -.43 71 50 27 III 82-83 -9.0 -.38 18 19 43 Uruguay Historic 1950-74 0.6 I 75-78 3.6 -.21 54 59 51 II 79-80 5.3 -.39 67 65 23 III 81-83 -4.8 -.16 13 35 68 Argentina Historic 1950-75 1.7 I 75-78 -0.9 .19 239 265 190 II 79-80 2.4 -.27 124 148 53 III 81-83 -4.3 -.33 204 204 295 Rest cf LA Historic 1950-74 3.4 I 75-78 2.9 II 79-80 3.8 III 81-83 -2.7 Stage I is the monetary-fiscal stabilization, stage II is the first (and main) part of the exchange rate based stabilization, and stage III is the collapse. Dates are annual and therefor not precise. Columns (3), (5), (6), and (7) are annual percentages. Source: Ramos (1986), from various tables. 39 Table 3. Real Lending Ratesa in Southern Cone Stabilizations Year Chile Uruguay Argentina 1975 127b 1976 18 1977 39 5 16b 1978 35 19 1 1979 17 -10 -2 1980 12 17 6 1981 39 24 19 1982 35 44 11 1983 16 28 a/ Percent, annual. b/ Second Semester (after liberalization of interest rates). Source: Ramos (1986), P. 154. 40 ISRAEL Table 4. Durables and Non-Durables Consumption 1980 1981 1982 1983 1984 1985 1986 1987 1988 Annual Increase in Percentage terms (at constant prices) 1. Durables Purchases -8.4 37.6 17.9 8.1 -32.0 -1.4 47.1 12.6 2.3 2. Non-Durable Consumption -2.0 7.8 5.9 6.2 -2.6 -0.3 10.2 7.6 3.7 3. Real Disposable Income 1.7 14.2 -2.6 2.8 8.7 -10.7 3.4 7.1 5.4 Annual Increase in Prices (Percent) 1. Durables Purchases 89.3 98.1 102.1 135.5 409.2 297.6 41.1 18.9 9.4 2. Non-Durable Consumption 133.7 121.8 117.8 146.6 381.4 294.0 47.8 20.2 16.0 Source: Bank of Israel Annual Reports 41 REFERENCES Barro, Robert J. (1986). "Reputation in a Model of Monetary Policy with Incomplete Infornmtion," Journal of Monetary Economics, vol. 17, January, pp. 3-20. Blejer, Mario and Nissan Liviatan (1987). "Fighting Hyperinflation - Stabilization Strategies in Argentina and Israel, 1985-8,' IMF Staff Papers, vol. 34, no. 3, pp. 403-38. Blejer, Mario and Nissan Liviatan (1987). 'Stabilization Strategies in Argentina and Israel, 1985-86,0 IMP Staff Papers, vol. 34, no. 3, pp. 403-38. Bruno, M., G. Di Tella, R. Dornbusch and S. Fischer (1988). Inflation Stabilization, Cambridge: MIT Press. Bruno, M. and Silvia Piterman (1988). 'Israel's Stabilization: A Two Year Review," in Inflation Stabilization, Bruno et. al. (eds.), 1-47. Calvo, Guillermo A. (1987). "Balance of Payments Crises in a Cash-in-Advance Economy," Journal of Money, Credit and Banking, 19, 19-32. Calvo, Guillermo A. (1986). 'Temporary Stabilization: Predetermining Exchange Rates," Journal of Political Economy, 94, 1319-1329. Calvo, Guillermo A. (1989). 'Temporary Stabilization Policy: The Case of Flexible Prices and Exchange Rates,' mimeo. Calvo, Guillermo A. and Carlos A. Vegh (1990), 'Credibility and the Dynamics of Stabilization Policy: A Basic Framework,' (mimeo). Corbo, Vittorio (1985). "Reforms and Macroeconomic Adjustments in Chile During 1974-84,' World Development, 13, 893-916. Cukierman, Alex and Nissan Liviatan (1989). "Optimal Accommodation by Strong Policy Makers Under Incomplete Information," The Foerder Institute for Economic Research, Working Paper no. 13-89, May. de Pablo, Juan Carlos (1974). 'Relative Prices, Income Distribution, and Stabilization Plans: the Argentine Experience, 1967-70,' Journal of Development Economics, vol. 1. de Pablo, Juan Carlos and Alfonso Martinez (1988). Argentina, World Bank manuscript. Di Tella, Guido (1979). 'The Economic Policies of Argentina's Labor-Based Government (1973-76),' in Inflation and Stabilization in Latin America, Thord and Whitehead (eds.). 42 Edwards, Sebastian and Alejandra Cox Edwards (1987). Monetarism and Liberalization - The Chilean Experiment, Ballinger Publishing Company. Finch, M.H.J. (1979). "Stabilization Policy in Uruguay since the 1950's," in Inflation and Stabilization in Latin America, R. Thorp and L. Whitehead (eds.), New York: Holmes and Meier Publishers, pp. 144-180. Fischer, Stanley (1986). "Exchange Rate Versus Money Target in Disinflation," in Indexing, Inflation and Economic Policy, MIT Press. Fischer, Stanley (1988). "Real Balances, the Exchange Rate and Indexation: Real Variables in Disinflation,' Quarterly Journal of Economics, pp.27-49. Foxley, Alejandro (1983). Latin American Experiments in Neoconservative Economics, Berkeley: University of California Press. Foxley, Alejandro, (1980). 'Stabjiization Policies and Stagflation: The Cases of Brazil and Chile," World Development, vol. 8, pp. 887-912. Garber, Peter M. (1982), Transition from inflation to price stability' in Carnegie-Rochester Conference Series on Public Policy, 16, pp. 11-42. Helpman, E. and A. Razin (1987). 'Exchange Rate Management: Intertemporal Tradeoffs," American Economic Review, 77, 107. Helpman, Elhanan and Leonardo Leiderman (1988). 'Stabilization in High Inflation Countries: Analytical Foundations and Recent Experience,' Carnegie Rochester Conference Series on Public Policy, no. 28, pp. 9-84. Heyman, Daniel (1987). 'The Austral Plan,' American Economic Review, vol. 77, no. 2, pp. 284-87. Kafka, Alexandre (1968). 'The Brazilian Stabilization Program 1964-66,' vol., no. , pp. 596-634. Kiguel, Miguel A. (1989). 'Inflation in Argentina: Stop and Go Since the Austral Plan," PPR Working Paper, no. , the World Bank. Kiguel, Miguel A. and Nissan Liviatan (1988). 'Inflationary Rigidities and Orthodox Stabilization Policies: Lessons From Latin America,' The World Bank Economic Review, vol. 2, no. 3 September, pp.273-298. Krugman, Paul (1979). 'A World of Balance of Payments Crises," Journal of Money, Credit and Banking, 11, 311-325. , and Lance Taylor. (1978). 'Contractionary Effects of Devaluation.' Journal of International Economics 8, 445-456. Liviatan, Nissan (1989). 'Israel's Stabilization Cycle with some Reference to Latin American Experience,' mimeo. 43 Liviatan, N. and S. Piterman (1986). *Accelerating Inflation and Balance of Payments Crises: Israel 1973-1984," in The Israeli Economy, Yoram Ben-Porah (ed.), Cambridge: Harvard University Press, pp. 320-46. Lizondo, Saul J., and Peter J. Montiel (1989). "Contractionary Devaluation in Developing Countries: an Analytic Overview." IMF Staff Papers 36, 182- 227. Makinen, Gail E. (1984), wThe Greek Stabilization of 1944-46", American Economic Review, 74, 1067-1074. Mozales, Juan Antonio (1990), "The Transition from Stabilization to Sustained Growth in Bolivia" (Mimeo). Modiano, Eduardo M. (1988). "The Cruzado First Attempt: The Brazilian Stabilization Program of February 1986," in Inflation Stabilization, Bruno et. al. (eds.), pp. 215-58. Obstfeld, Maurice (1985). "The Capital Flows Problem Revisited: A Stylized Model of Southern Cone Disinflation," Review of Economic Studies, 52, 605-26. Pazos, Felipe (1972). Chronic Inflation on Latin America, Praeger. Petrecolla, Alberto (1989). "Unbalanced Development 1958-62," in The Political Economy of Argentina 1946-83, Di Tella, Dornbusch (eds.), University of Pittsburgh Press. Ramos, Joseph (1986). Neoconservative Economics in the Southern Cone of Latin America, 1973-1983. The Johns Hopkins University Press. Rodriguez, Carlos A. (1982). "The Argentine Stabilization Plan of December 20th," World Development, vol. 10, no. 9, pp. 801-811. Sargent, T. J (1982), "The End of Four Big Inflations", in Inflation: Causes ai.d Effects, R.E. Hall, ed. (Chicago: University of Chicago Press), pp. 41- 96. Schydlowsky, Daniel M. Comment in Political Economy of Argentina (above), pp. 175-187. Simonsen, Mario Henrique (1974). "The Anti-Inflation Policy," The New Brazilian Economic, Mario Henrique Simonsen and Roberto de Oliveira Campos (eds.), Rio de Janeiro, Brazil: Crown Editores Internacionais. Taylor, John (1979). "Staggered Wage Setting in a Macro Model," American Economic Review Papers and Proceedings, vol. 69, pp. 108-13. Thorp, Rosemary (1965). "Economic Polices in Argentina in the Post-War Years,' Bulletin of the Oxford University Institute of Statistics, vol. 27, no. 2, pp. 19-43. 44 Viana, Luis (1988). "The Stabilization Plan of 1968,0 mimeo, Banco Central del Uruguay. Wicker, Elmus (1986), "Terminatus Hyperinflation in the Dismembered Habsburg Monarchy', American Economic Review, 76, 350-64. -45- - ==L.. i FISCAL DEFICIT, CPI INFLATION, AND OFFICIAL DEVALUATION I. ARGENTINA DEFICIT (% OF GDP) INFLATION, DEVALUATION (x) 20- * ~~~~~~~~~~~DEFICIT. - /1II 700 E1 .6_'p U N-100 15 / 1 / V ~~~500 10- 2. BRAZILV300 <.~~~~~~~// ..I I' / ~~~~~ 200 0 7 " " 70 *1 70 0 iS 5w . @ae tz . _ 1;: I2 BRAZIL 0 V~~~~~~~~~~~~~~~~~~~~~~~~~~~~7 4 ~ 8 0 2 4 6 8 0 27 7 7 8 8 8 8 8 SOURCES: DE PABLO AND INDICADORES DE COTUNTURA~~~~~~s 11' U 3 .4 ' 7 4 0 7 1 7 73 to.0to dmmce £. womau. Ago W anm A. unmauum *se -6- FISCAL DEF:cI, CPI :N LA8:N, AkND OFFIC.AL ''EalA=:ON 3. CYuILE '. RUGUAY a MO ) I[LTIDX DIVAACUAT50X Outf IC (S O DP\ 11DX b: ._X '*00 - 2. 5.0.0~ !I' 6. ISRAEL .5 2!5~~~~~~~~~~~~~~~~~~~. X j 10~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ -21 a t0 198l 19 ;9m- 19" 19% tiW l9 < }IC5 74 7 L9l 79870 0 e J9t8 ae -5B oderS 4 70 ? c a0 _ _ _ _\D_ _A__ _ OR/ _ _ _ Mto& a X 19 1982 19 198 JIM 19" 1Ge9 1988 1 989 SOtNZC: 1AK or tI -47- GDP GROWTH AND CURRENT ACCOUNT 1. ARGENTINA CURRENT ACCOUNT GDP GROWTH (MILL. US$) 15- j I / ,/ 2000 ! 'CURRENT AC$4NT *1 1000 10 60 6 64 6 ' I ~~~~~~0 0 7 DP GROW -3000 -10 -5000 58 6 62 64-66 68 70 72 74 76 78 80 82 84- 86 88 SOURCES: FUNDACION MED[TBRANEA, INDICADORES DE COYUNTURA, AND [FS 2. BRAZIL omou.r~~~~~~ t~~3 ct-mt*I4r3 &rCOUNf (WILL. Up" g MO?LAL PUOOUC?foM 0s0?U (XI TIIAU* tLALAKiClI I 1 0 I-'--~~~~~~~~~~~~~~~~~2 o 10 75~~~~~~~~~~~~~~~~~- -1000~~~~~~~~~~~~~~~~~~~~ 1007 66 63 465 6 67 60 66 70 71 72 73 w9ee SOS goa,apsm~ ~ ~ ~~~~~~~~~~~~gU~ UUC -A43- GDP GROWTH AND CURRENT ACCOUNT 3. CHILE 4. URUGUAY CUlUiT ACCOUW? cu*""t;"t ~ ~ co CDt CCTB {j% jIz s.$) -- FFa.a.tw 1.0 -- , 2~~~00 _|~~~~~ ._ -La , MNEM 661000 49"U" 0 CFAGJ savics9 L Vt" AiD " 5. 8EXIC0 6. ISRAEL cv.u"S ACCN>T I&LUlt} NaX ; w aRow?l (s) _ tUADI R&ANC OdILL *~~~~~---, - 600^_-7o 908x08 ce 5 sXo0 7 Le 100na, aUUa s=sz e t7 eie e -3000 3 -00 74 Th76 7 7 U a Un 90 n LOGO4 64 I 6 0 7 7 6 713 --UM m ean One'u eua.a uouao L VUM t*.nn -49- A: AP-'ET!--A RESIDUAL 0.075-~'7 0.050- . ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ . 0.025- 0.000 / -0.025 / -0.050- -0 .075 --,, , / _ 1955 1960 1965 1970 1975 1980 1985 2. BRAZIL 0.100 o.' 0. L75 f: 00.03 0.02 Q-010004 __ __ 1956 1110 186 1864 ±866 O 1870 1872 1974 1112 1813 L84 86 LQS 1867 196S LOIS -50- n3EVIATION OF LOG GDP PER CAPITA FR)M' Tt'" 3. CHILE 4. URUGUAY e2, U' a's ;' 72 74 X,d 7 ea a de as U4 00 70 72 74 7e 7e 80 a 5. MtEXICO 6. ISRtAEL IMDtFAL 1UIDUFAJ G.M75 ~~~~~~~~~~~~~~~~~~~0.10 a.01~~~~~~~~~~~~~~~~~~. -.05 9t67 - l .e0 ag -015190 LN -.a M l M. REAL EXC'iA':GE PRATE -ND EAL ';ACE 1. ARGENTINA REAL EXCHANGE RATE REAL WAGE (1980=100) (1980=100) 300- 130 / /I/ / 7,' .t'~~~~~ / // ~~120 250 / .7< A, REAL EXCHANGE> v I .7 *i'. ~110 200< Xlo 200 I ~~~~~~~~~~~~~~100 150i ' K R 'o 50 - / I 1 * X60 8' 60' 6264- ~66 68 70 72 74 76 78 80 82 814 816 818 SOURCE: COTTAN/ , DE PABLO, AN DNDICADOES DE COYUNTUR 2. BRAZIL 525 m sag "~~ a a is 7 1. n lw _ SmC CW-ftAUI aginPI*0g . WAUA AN* L ?AVOt #GAS LLSAnU I[m-.mYg*mgmm*gy m _|g iCulrnt o -l tor slow$ - 52 - REAL EXCHANGE AND REAL WAGE 3. CHILE 4. URUGUAY on"a tolde-too 175 i.euAae ara am_-tm, ________ - -_ kIAL lit .9606 L4tp .- !aC U 75 74 7S 'M 77 "I U 43 05 Of za " : 2 7 7 M OM C- AS* aOs m An so &a certm. L flANA A" ?U vrn* Es" 5. MEXICO 6. ISRAEL LM L~~~~~~~~~~~~~~~~~40 Ruh KX'e---* VATS A £40 £20 im. 1064 106! 16ls L967 Los LMa 6 6 a U 6 U 67 U U muxa £ IACO D1l 0 O !IIJiSW UY M Pasi Dots WAGE wA Is nD Lo is UAOAX Anw -53- REAL GROWTH RATES OF GDP, PRIVATE CONSUMTION, AND INVESTIENT peIlNT s? P3NCUT 50~~~~~~~~~~~~~~~~~~2 40 // , ~~~ !~R('VA Th r. SUMPTflO. 30 1l \'. 'ow*uogupz, */-0' /¾- -20~~~~~~~~~~~~~~2 -30 10S8 1o" 1lO0 1061 1062 t03 10E4 74 75 76 77 73 79 90 81 32 N 4 35 -SUCu PUNOACLON SWIITRI3AMIA oUKCs Ts? CENTRAL MARC OF AOrSNT(RA 25 40 20 :// 0-- ;°L'''V~ ~, ''A<, ''Ilf/ kS 5~~~~~~~~~ '/ l7 ; 9 T 1 7 3 N 9Wt Is / 15 1@71~~~~~~ ~ 10Z1 t7 t95 t7 l7 _ % n e_-20 ON SO3IIUANIA ~~~~~~-40 r 20 ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~~~21 0611 ISIS Itil ISIS 10?4 3075 3973 lo" G-ICI PuEsueON. in(?USAMA -54- REAL GRO4TH RATES OF GDP, PRIVATE CONST.TPTION, AND INVESTMENT 2. 3 t.A7_ 20. pi', ., 10 30~ ~ ~ ~ ~ ~ ~~~~~~~~~~~~5 _1 \\s, I \ vu; ce"etlo_75. . ;I, C Z a 5 664 S07 70 71 72 73 G 19t t t907 SWn IM w?o11 ga te Or eCA. ro tH E. QUATl LAST tEA& mOCrn COmuuygtUa mCuOUICA 3. CHILE 4. URUGUAY 3t A,I*'~ NN v w -. Xt to v S v io 1C -310 %VI '= \§ / - 30 -~~~~~~~~~~ N. ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ - 74 75 76 77 711 70 SO St aD a3 72 6 mSe. PANCO CIlt"c n011CL11 SOz Ia TIS VOULD Ul 5. MEXICO 6. ISRAEL s at KuL TXu ncsa L ___ L5 'vtl PAI I9s4" LN ± ±917 L o tlSUt LtCtO UZ C5 S1DiU SUNK CW hUO A PRE Working Paper Series Contact DX6 AuthbQ IAL for pagr WPS496 Issues in Evaluating Tax and Robert Conrad August 1990 A. BhalIa Payment Arrangements for Publicly Zmarak Shalizi 37699 Owned Minerals Janet Syme WPS497 The Measurement of Budgetary Carlos Elbirt August 1990 T. Gean Operations in Highly Distorted 34247 Economies: The Case of Angola WPS498 The Build, Operate, and Transfer Mark Augenblick August 1990 D. Schein (1BOT) Approach to Infrastructure B. Scott Custer, Jr. 70291 Projects in Developing Countries WPS499 Taxing Foreign Income in Capital- Chad Leechor September 1990 A. Bhalla Importing Countries: Thailand's Jack M. Mintz 37699 Perspective WPS500 Projecting Fertility for All Countries Eduard Bos September 1990 V. Altfeld Rodolfo A. Bulatao 31091 WPS501 Tax Systems in the Reforming Cheryl W. Gray September 1990 L. Lockyear Socialist Economies of Europe 36969 WPS502 Patents and Pharmaceutical Drugs: Julio Nogues September 1990 M. T. Sanchez Understanding the Pressures on 33731 Developing Countries WPS503 Household Production, Time John Dagsvik September 1990 M. Abundo Allocation, and Welfare in Peru Roff Aaberge 36820 WPS504 Applying Tax Policy Models in Henrik Dahl September 1990 A. Bhalla Country Economic Work: Pradeep Mitra 37699 Bangladesh, China, and India WPS505 Creating the Reform-Resistant Arye L. Hillman September 1990 CECSE Staff Dependent Economy: The CMEA Adi Schnytzer 37176 International Trading Relationship WPS506 Changes in Food Consumption Merlinda D. Ingco September 1990 A. Daruwala Patterns in the Republic of Korea 33713 WPS507 Poverty in Poland, Hungary, and Branko Milanovic September 1990 A. Bretana Yugoslavia in the Years of Crisis, 37176 1978-87 WPS508 A RMSM-X Model for Chile Luis Serven September 1990 S. Jonnakuty 39074 WPS509 The Childbearing Family in Odile Frank September 1990 B. Rosa Sub-Saharan Africa: Structure, 33751 Fertility, and the Future PRE Working Pager Series Contact TLe AtAhor S2S for paper WPS51 0 Public Expenditure Reviews for Antoine Schwartz October 1990 C. Cristobal Education: The Bank's Experience Gail Stevenson 33640 WPS511 The Macroeconomic Underpinnings Fred Jaspersen October 1990 A. Oropesa of Adjustment Lending Karim Shariff 39075 WPS512 Social Security Reform: The Capital Patricio Arrau October 1990 S. King-Watson Accumulation and Intergenerational 31047 Distribution Effect WPS513 The Business Cycle Associated with Miguel A. Kiguel October 1990 E. Khine Exchange-Rate-Based Stabilization Nissan Liviatan 39361 WPS514 Restrictive Labor Practices in Alan S. Harding October 1990 A. Joseph Seaports 33743 WPS515 Stock Markets in Developing Mansoor Dailami October 1990 M. Raggambi Countries: Key Issues and a Michael Atkin 37657 Research Agenda