Working Paper: NBER ID: w2718
Authors: Michael Bruno
Abstract: The concept of Economic Reform is described as a planned shift from one, Pareto inefficient, but quasi-stable, equilibrium (or 'trap') to a new Pareto superior equilibrium which is, or is designed to become, stable too. The concept is applied to recent 'shock' stabilization programs, with special reference to Israel, where the economy was credibly shifted from a 3-digit inflationary process with considerable inertia, to relative price stability with higher real growth, at only small adjustment costs, by means of a 'heterodox' plan. This two-pronged stabilization program consisted of a substantial correction of budget and external account 'fundamentals' together with a synchronized, wage-price-exchange rate freeze. The idea is theoretically rationalized within a simple dual equilibrium inflation model, for which some econometric estimates are also given.
Keywords: Economic Reform; Inflation; Stabilization Programs; Israel
JEL Codes: E63; H63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Budget Deficit (H62) | Inflation Rate (E31) |
| Wage-Price-Exchange Rate Freezes (E64) | Inflation Rate (E31) |
| Budget Deficit (H62) | Low Inflation Equilibrium (E31) |
| Adaptive Expectations (D84) | Low Inflation Equilibrium (E31) |
| Low Inflation Equilibrium (E31) | High Inflation State (E31) |