Disinflation and the Recession-Now-Versus-Recession-Later Hypothesis: Evidence from Uruguay

46 Pages Posted: 15 Feb 2006

See all articles by Alexander W. Hoffmaister

Alexander W. Hoffmaister

International Monetary Fund (IMF) - Research Department

Carlos Végh

affiliation not provided to SSRN

Date Written: October 1995

Abstract

Both analytical models and casual empiricism suggest that the timing of the recessionary costs associated with inflation stabilization in chronic inflation countries may depend on the nominal anchor which is used. Under money-based stabilization, the recession occurs at the beginning of the program, while under exchange rate-based stabilization the recession occurs later in the program. This paper provides a first attempt to formally test this hypothesis using a vector-autoregression model for Uruguay. The impulse response of output to different stabilization policies is broadly consistent with the "recession-now-versus-recession-later" hypothesis. The evidence also suggests, however, that the effectiveness of a monetary anchor in reducing inflation is hindered by the high degree of dollarization of the Uruguayan economy.

JEL Classification: E3, E5, C3

Suggested Citation

Hoffmaister, Alexander W. and Végh, Carlos, Disinflation and the Recession-Now-Versus-Recession-Later Hypothesis: Evidence from Uruguay (October 1995). IMF Working Paper No. 95/99, Available at SSRN: https://ssrn.com/abstract=883246

Alexander W. Hoffmaister (Contact Author)

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Carlos Végh

affiliation not provided to SSRN

No Address Available