Working Paper: NBER ID: w1810
Authors: Rudiger Dornbusch; Stanley Fischer
Abstract: We examine four successful stabilizations from high inflation -- Germany in 1923,Austria in 1922, in Poland 1924-27, Italy 1947 --and the two ongoing attempted stabilization in Israel and Argentina, with the aim of identifying general lessons from those episodes. The key issues in a stabilization are the budget, the exchange rate, and money. Budget deficits were significantly reduced in each case , but were not in all cases completely removed. The exchange rate was pegged in each case , through in all but the Italian case, each stabilization was also preceded by at least one episode in which attempted stabilization through exchange rate pegging was unsuccessful. As pointed out by Sargent and others , money growth rates were high after each stabilization, suggesting that any stabilization that strictly controls the growth of money will produce serious recession. A common feature of stabilizations is a period of extremely high real interest rates.
Keywords: Hyperinflation; Stabilization; Economic Policy
JEL Codes: E31; E42; H63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| budget corrections (H72) | economic stability (E63) |
| successful stabilizations (E63) | budget deficits (H62) |
| pegging the exchange rate (F31) | economic outcomes (F61) |
| high money growth rates (E49) | recessions (E32) |
| high real interest rates (E43) | demand (R22) |