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stabilization plans: deflate often hurt

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.

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Spain and the influence of drawers (post by invitation)

inaugurate the 'by invitation' in the blog. Today, Orejana .

At times difficult to distinguish the influence of education in our way of perceiving the world. Just look at the pages of any of the economic sections of major newspapers in the world to have a full dimension of the situation facing Spain: recession, twin deficits, rising unemployment and high wage costs. But the problem of the motherland is not inside but outside its borders.

Valga an anecdote to illustrate the case. The island of Hong Kong remained until July 1, 1997 under British government control, from which time he left his colonial status to annex the territory of the People's Republic China. However, the transfer agreement was signed in December 1984, almost thirteen years before the actual transfer. The possibility that the island was ruled by the giant eastern generated a significant decline in asset prices since the start, particularly the real estate industry (after all, what difference would the rights of property under a communist government?). In any case, in those years of the early eighties, families and businesses in Hong Kong faced the loss of a significant proportion of their wealth. Faced with the possibility of a recession, the government of the island decided to implement a substantial devaluation of local currency (almost a third of its value.) The devaluation allowed this case to distribute the losses between debtors and creditors, blending liabilities denominated in Hong Kong dollars (elegant, when compared with the subsequent devaluation and asymmetric pesification Argentina). Neither history nor analysis belong to me, both are well documented in a concise written work a few years ago by Beer, Sargent and Wallace . For those interested, they know better than me explain the details.

back to the Iberian Peninsula, Spain does not seem so far away from Hong Kong (in economic and non-geographic, of course). The international crisis triggered a review of the wealth of individuals: a drop in the price of real estate and major assets the economy. With one difference: his commitment to a currency that does not control.

certainly difficult to distinguish the influence of education in our way of perceiving the world. In my case, I find it hard not to insist on some issues, and often return to the same debates over and over again. In this, everything seems reduced to a problem of rules versus discretion or flexibility against rigidity, as we remembered during a Saturday platense DH. Of course the problem could be avoided. In the final analysis, the vulnerability of the economy should always be a result of the policy implemented, but that is a topic for researchers (and those who enjoy Uchrony). No rule is moved, the great cronopio told us, the question always falls on the scale of the shock.

plagiarizing an old singer Huanguelén payments, I think a model is like a drawer. If there is something useful in an open it all the time, and if inside is crap, does not open ... never with enough crap out there.

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doctoral Fellowship at UNLP

Foncyt Scholarship - PICT 799/2007

Grant duration: 2 years

Start: 01/04/2010

$ 3,141 monthly stipend

Contest Closing: 01/03/2010

Topic: Study of municipal public sector and contributions for modernization. Argentina has a serious flaw in the way public sector organization with very small base (municipalities) and a pronounced peak (national and provincial governments). The study of the causes of this shortcoming and suggested reforms offer useful and relevant ideas for the design and evaluation of public policies.

Description of the issue of the scholarship:

Economic Theory of municipal governments 1. The division of powers and resources, the role of intergovernmental transfers. 2. Impact of decentralization policies on economic efficiency, income distribution, governance, transparency, fiscal responsibility, local development, political participation and civic virtues. 3. Applications to the municipal public sector Argentina.

doctorado@depeco.econo.unlp.edu.ar

alberto@depeco.econo.unlp.edu.ar