Lessons of Economic Stabilization and Its Aftermath.

• Author: Feldman, David

This book is the product of a 1990 conference co-sponsored by the Bank of Israel and the Inter-American Development Bank. The conference brought together economists and policymakers to assess the stabilization episodes of five Latin American nations and to compare their experiences with that of Israel, Turkey, and Yugoslavia. Together with an earlier MIT Press volume (Inflation Stabilization, 1988), this collection of essays offers an impressive description of the major "heterodox" efforts at economic stabilization undertaken over the past decade. The chapters are organized by country, and useful comments follow each piece.

Juan Antonio Morales reviews the Bolivian experience while Vittorio Corbo and Andres Solimano examine Chile. Both cases confirm that fiscal restraint, tight monetary control and heavy exchange rate doctoring can have a profound immediate effect on runaway inflation. Long run stability and future government credibility remain uncertain if fiscal restraint is achieved by slashing social and infrastructure expenditure and high real interest rates limit private investment. Corbo and Solimano also estimate a simple model of inflation determination to evaluate why inflation took so long to fall in Chile. As one discussant noted, their approach is subject to the Lucas critique in that they assume key macroeconomic coefficients are invariant to the policy regime.

Daniel Heymann and Eliano Cardoso examine the failed heterodox programs in Argentina and Brazil, respectively. The Argentine chapter is dated since the conference preceded the Menem government's reforms. Miguel Kiguel and Nissan Liviatan follow with a comparative look at the inflation-stabilization cycles in these countries. Both nations experienced highly unstable rates of inflation after implementing stabilization programs. Kiguel and Liviatan attribute this to repeated use of incomes policies as a substitute for getting the fundamentals right, and not to fiscal imbalance or debt overhand per se. In such a climate, anticipation of government actions by firms and workers soon create the unstable money demand that fuels inflationary explosions.

The Israeli experience is described by Michael Bruno and Leora Meridor. Israel, like many other nations, slipped into recession during its stabilization/reform program, though the downturn was quite delayed by Latin American standards. Despite the Intifada as an exogenous factor, they see the recession as an endogenous feature of...