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Why Do Many Disinflations Fail? the Importance of Luck, Timing, and Political Institutions

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  • Mr. A. J Hamann
  • Mr. Alessandro Prati
Abstract
Many inflation stabilizations succeed only temporarily. Using a sample of 51 episodes of stabilization from inflation levels above 40 percent, we show that most of the failures are explained by bad luck, unfavorable initial conditions, and inadequate political institutions. The evolution of trading partners' demand and U.S. interest rates captures the effect of bad luck. Past inflation affects the outcome in two different ways: a long history of high inflation makes failure more likely, while a high level of inflation prior to stabilization increases the chances of success. Countries with short-lived political institutions, a weak executive authority, and proportional electoral rules also tend to fail. After controlling for all these factors, we find that exchange-rate-based stabilizations are more likely to succeed. These findings are robust across measures of failure (two dichotomous and one continuous), sample selection criteria, and estimation techniques, including Heckman's correction for the endogeneity of the anchor.

Suggested Citation

  • Mr. A. J Hamann & Mr. Alessandro Prati, 2002. "Why Do Many Disinflations Fail? the Importance of Luck, Timing, and Political Institutions," IMF Working Papers 2002/228, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2002/228
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    References listed on IDEAS

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    2. Michele Peruzzi & Alessio Terzi, 2018. "Growth Accelerations Strategies," Growth Lab Working Papers 112, Harvard's Growth Lab.
    3. Marc Hofstetter, 2008. "Why Have So Many Disinflations Succeeded?," Contemporary Economic Policy, Western Economic Association International, vol. 26(1), pages 89-106, January.
    4. Ravenna, Federico, 2005. "The European Monetary Union as a commitment device for new EU member states," Working Paper Series 516, European Central Bank.
    5. Guido Tabellini, 2005. "The Role of the State in Economic Development," Kyklos, Wiley Blackwell, vol. 58(2), pages 283-303, May.
    6. Alessandra Bonfiglioli & Gino Gancia, 2015. "Economic Uncertainty and Structural Reforms," Working Papers 847, Barcelona School of Economics.
    7. Alessandra Bonfiglioli and Gino Gancia, 2010. "The Political Cost of Reforms," Working Papers 507, Barcelona School of Economics.
    8. Francesco Di Comite & Thomas Lambert, 2020. "Reforming Finance Under Fragmented Governments," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 62(1), pages 105-148, March.
    9. Rueda R., Miguel Ricardo, 2008. "Breaking Credibility in Monetary Policy: The Role of Politics in the Stability of the Central Banker," IDB Publications (Working Papers) 1627, Inter-American Development Bank.
    10. Alberto Alesina & Silvia Ardagna & Francesco Trebbi, 2006. "Who Adjusts and When?The Political Economy of Reforms," IMF Staff Papers, Palgrave Macmillan, vol. 53(si), pages 1-1.
    11. Hans Pitlik, 2008. "The Impact of Growth Performance and Political Regime Type on Economic Policy Liberalization," Kyklos, Wiley Blackwell, vol. 61(2), pages 258-278, May.
    12. Guido Merzoni & Federico Trombetta, 2016. "The cost of doing the right thing. A model of populism with rent-seeking politicians and the economic crisis," DISEIS - Quaderni del Dipartimento di Economia internazionale, delle istituzioni e dello sviluppo dis1602, Università Cattolica del Sacro Cuore, Dipartimento di Economia internazionale, delle istituzioni e dello sviluppo (DISEIS).
    13. Francisco Jose Veiga, 2008. "Why do stabilizations fail?," Journal of Economic Policy Reform, Taylor and Francis Journals, vol. 11(2), pages 135-149.
    14. Peruzzi, Michele & Terzi, Alessio, 2021. "Accelerating Economic Growth: The Science beneath the Art," Economic Modelling, Elsevier, vol. 103(C).
    15. Francisco José Veiga, 2003. "The Political Economy of Failed Stabilization," NIPE Working Papers 13/2003, NIPE - Universidade do Minho.
    16. Miguel Rueda, 2008. "Breaking Credibility in Monetary Policy: The Role of Politics in the Stability of the Central Banker," Research Department Publications 4585, Inter-American Development Bank, Research Department.
    17. Ana Carolina Garriga, 2017. "Regulatory lags, liberalization, and vulnerability to banking crises," Regulation & Governance, John Wiley & Sons, vol. 11(2), pages 143-165, June.
    18. Jean‐Marc B. Atsebi, 2024. "Igniting growth surges: Lessons from the past," Economics of Transition and Institutional Change, John Wiley & Sons, vol. 32(2), pages 525-569, April.
    19. Rapetti, Martin & Palazzo, Gabriel & Waldman, Joaquin, 2023. "Planes de estabilización: Evidencia de América Latina [Stabilization plans: Evidence from Latin America]," MPRA Paper 118910, University Library of Munich, Germany.
    20. Miguel Rueda, 2008. "Credibilidad en la política monetaria: Papel de políticas en la estabilidad del Presidente del Banco Central," Research Department Publications 4586, Inter-American Development Bank, Research Department.
    21. Witold Jakóbik, 2007. "On the Fundamental Principles of Economic Policy," Contemporary Economics, University of Economics and Human Sciences in Warsaw., vol. 1(2), June.

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