As has been discussed on several blogs of BEA , inflation is an issue that raises concerns. Our country is not on the verge of hyperinflation but accumulated 5 years (depending Bs As City ) with variations in the general price level of 2 digits and everything seems to indicate that this year will also be included in the count.
The aspect that worries me most about inflation dynamics and the general effects on the real exchange rate policy framework exchange parity trying to sustain a relatively high public sector and a dwindling savings . In other words, the persistence of positive inflation differential with the rest of the world is only compatible with maintaining the nominal exchange rate stable if the other major currencies appreciated. Hope this ever occurring is unlikely (at least based on past evidence) and therefore needed constant nominal devaluations that can generate a price dynamics characterized by a constant acceleration, especially if the national treasury needs financed monetary issue. The latter has become important ingredient this year and no access to debt markets in the near future may further complicate the dynamics of inflation .
Well, anyway, I go to the title of the post. In the classes for International Finance at the faculty learned about stabilization plans based on the work of authors such as Calvo and Vegh who managed to synthesize the impact of these plans a theoretical model which classifies them as the main tool in which they are based: the exchange rate (eg : convertible) or the money supply.
Both plans generate recessions or reduce growth. The main difference is that one generates the recession at the beginning (money supply) and the other end (exchange rate). This result is confirmed in the model through the the same settings (what model will be free of this?), Is largely supported by empirical evidence collected.
Below are the main results and listed in this paper .
stabilization plans based on exchange rate: Slow
- convergence of the inflation rate of devaluation (ergo, exchange rate appreciation )
- initial increase in economic activity followed by a subsequent fall.
- Findings of the real exchange rate
- Deterioration of the trade balance and current account.
- ambiguous response by the domestic real interest rate.
based stabilization plans in the money supply: Slow
- convergence of inflation to the growth rate money supply (read demonetization).
- Findings of the real exchange rate.
- No clear results on the change in trade balance.
- initial contraction of economic activity.
- initial increase in the domestic real interest rate.
You see, the results mix is \u200b\u200bnot very nice but give us an idea that we should stick if we deflate. Mainly , we must be clear that the level of activity eventually falls and the real exchange rate appreciates. These results are not revealed truth and there may be other results possible (as the total absence of real effects attributed to the Calvo credibility) but it should be clear that when it comes to stabilization plans (generally the orthodox type) is a bit useless criticize because recessions or appreciation since the end it is the price to pay and no guarantee that the status quo may not carry the last two events without any plan whatsoever.
