Chap06 Inflation and Disinflation Programs FMM

Chapter 6
Inflation and Disinflation

Programs
Completado por
Fernando Martín Mayoral Ph.D.
© Pierre-Richard Agénor
The World Bank
1
INTRODUCCIÓN
 “Inflation is an old, old disease” Milton Friedman
 Una elevada inflación conlleva un costo social, particularmente
para aquellos que no se benefician de la indexación.
 Aunque las tasas de inflación muy elevadas se han moderado
desde 1990s en todo el mundo, es importante aprender cuales
fueron los determinantes de dichos procesos inflacionarios.
 Las causas de la inflación pueden variar entre países,
pudiendo ser atribuidas a factores de oferta, de demanda o de
ambos. Su estudio ha generado profundos debates.
 Valorar las fuentes de inflación y evaluar las estrategias
alternativas para desinflacionar, han sido por muchos años
objeto de investigación relacionada con temas de estabilización
en países en desarrollo, particularmente en América Latina.
2
INDICE
6.0. Nociones básicas
6.1. Sources of Inflation
6.1.1. Hyperinflation and chronic Inflation
6.1.2. Fiscal Deficits, Seigniorage, and Inflation
6.1.3. Other sources of Chronic Inflation
 Wage Inertia
 Exchange Rates and the Terms of Trade
 The Frequency of Price Adjustment
 Food Prices
 Time Inconsistency and the Inflationary Bias
6.2. Nominal Anchors in Disinflation: Money vs. the
Exchange Rate
6.3. Disinflation Programs: The Role of Credibility
3
6.4. Two Recent Stabilization Experiments
NOCIONES BÁSICAS
INFLACIÓN es el aumento generalizado de los precios. La inflación
implica una pérdida en el poder de compra del dinero, es decir, las
personas cada vez podrían comprar menos con sus ingresos. A
mayor inflación menor valor del dinero (>π <m (real money balances)
Medición: Índice de precios al consumo (IPC):
En el Ecuador, ver documento :
http://www.ecuadorencifras.gob.ec/documentos/web-
inec/Inflacion/2015/InflacionEnero2015/Presentacion_Metodologica_I
PC%28Base_2014=100%29_pdf.pdf
 IPCt  IPCt 1 
Inflaciónt     100
 IPCt 1 
4
EL DEFLACTOR DEL PIB
 La inflación también puede ser medida a partir del Deflactor
del PIB.
𝑃𝐼𝐵 𝑛𝑜𝑚𝑖𝑛𝑎𝑙 𝑜 𝑎 𝑝𝑟𝑒𝑐𝑖𝑜𝑠 𝑐𝑜𝑟𝑟𝑖𝑒𝑛𝑡𝑒𝑠
𝐷𝑒𝑓𝑙𝑎𝑐𝑡𝑜𝑟 𝑑𝑒𝑙 𝑃𝐼𝐵 = 𝑥100
𝑃𝐼𝐵 𝑟𝑒𝑎𝑙 𝑜 𝑎 𝑝𝑟𝑒𝑐𝑖𝑜𝑠 𝑐𝑜𝑛𝑠𝑡𝑎𝑛𝑡𝑒𝑠
 La ventaja del deflactor del PIB es que tiene en cuenta
todos los bienes y servicios producidos en un país por
agentes residentes (nacionales o no) en un año, y no solo
aquellos que forman parte de la cesta de la compra como el
IPC.
 El inconveniente es la periodicidad de los datos, su carácter
agregado el retaso en la publicación de los mismos y su
posible manipulación por parte de los gobiernos.
 d PIBt  d PIBt 1 
Inflaciónt     100
 d PIBt 1  5
Distintas mediciones de la inflación
 Inflación interanual: mide la evolución de los precios durante doce
meses consecutivos, tomando como referencia el dato de IPC de
cualquier mes del año.
 Inflación acumulada: mide la evolución de los precios desde el 1 de
enero hasta el mes que se toma como referencia.
 Inflación subyacente: Cuantifica la evolución de precios
descontando de la cesta aquellos productos cuyos precios presentan
una elevada volatilidad. Para su cálculo se excluye la evolución de
precios de los productos agrícolas no elaborados y de los
productos energéticos.
 Desinflación: Cuando, partiendo de altos niveles inflacionarios, se
consigue reducir el ritmo de crecimiento de los precios durante varios
períodos consecutivos. Los precios crecen, pero cada vez menos en
términos porcentuales.
 Deflación: Significa que el crecimiento de los precios es negativo,
esto es, cuando la inflación es negativa o menor que cero.
Diferencia entre la desinflación y la deflación.
Representación gráfica
Inflación
Desinflación
0
tiempo
Deflación Evolución de la variación de

precios en el tiempo
Cuando la inflación es positiva y decreciente se

está en una fase de desinflación. Si se traspasa el
umbral cero de variación de precios, llegando a
registrar un crecimiento negativo, se pasa entonces
a un estado de deflación.
Costes de la inflación esperada
 Coste suela de los zapatos: ante fuertes procesos inflacionarios,
los individuos evitan tener su dinero parado para no perder poder
adquisitivo. Realizarán compras tan pronto como reciben su salario,
que normalmente se paga semanalmente. Desincentiva el ahorro.
 Costes de menú: derivados de la necesidad de cambiar los precios
de referencia con los que vienen marcados los artículos en los
establecimientos (carta del restaurante, máquinas expendedoras,
etc.)
 Pérdida de competitividad de las empresas (exportadoras)
cuando existe un diferencial de inflación con los principales socios
comerciales del país.
 Aumenta la incertidumbre: reduce la inversión tanto nacional como
extranjera.
 Distorsiones fiscales: efectos Patinkin y Olivera-Tanzi.
Cuando la inflación no es esperada

Distribuye la riqueza de los individuos de forma arbitraria. Traspaso
de riqueza de los acreedores a los deudores.
CAUSAS DE LA INFLACIÓN
No existe acuerdo entre las distintas escuelas de pensamiento.
ENFOQUE MONETARIO:
 ESCUELA CLÁSICA : Una de las primeras explicaciones de la
inflación es la teoría cuantitativa del dinero (Irving Fisher,
1911): la inflación está directamente relacionada con aumentos
de la cantidad de dinero (1:1).
 Dado que los clásicos suponen una situación de pleno empleo,
la Oferta agregada es inelástica.
 Un ↑OM → ↑Da (Oa cte) → ↑π.
 Es decir, por la ecuación
cuantitativa: MV=YP
Y y V son constantes
 Entonces ∆M = ∆P (neutralidad del dinero: un cambio en la cantidad de
dinero afecta sólo a las variables nominales (precios, salarios y tipo de
cambio), sin afectar a las variables reales (empleo, PIB, consumo).
ENFOQUE MONETARIO: ESCUELA CLÁSICA
 During The French Wars from 1792 to 1815, Bank of England printed too
much paper money and caused inflation in England (high price of gold
bullion (lingotes).
 Ricardo first gained notice among economists over the “bullion controversy.”
In 1810 he wrote that England’s inflation was the result of the Bank of
England’s propensity to issue excess banknotes. In short, Ricardo was an
early believer in the quantity theory of money, or what is known today
as monetarism. http://www.econlib.org/library/Enc/bios/Ricardo.html
 In the essay The High Price of Bullion, a Proof of the Depreciation of Bank
Notes, published in 1810. Ricardo further told Bank of England in the essay
that inflation also affected foreign exchange rates and the flow of gold.
 Thomas Malthus en 1811 publicó 2 artículos sobre temas monetarios.
Deprecitation of Paper Currency y Pamphlets on the Bullion Question
(Edinburg Review XVII y XVIII, 1811). Coincide con Ricardo en que la causa
esencial del elevado precio de los lingotes de oro fue la excesiva impresión
de dinero, pero criticó a Ricardo por el exclusivo énfasis en la oferta
monetaria ignorando la demanda monetaria. (John Pullen (1989) T. R.
Malthus: Principles of Political Economy). 10
ENFOQUE MONETARIO (cont.):
 Para Milton Friedman “La teoría cuantitativa es, en primer lugar, una
teoría de la demanda de dinero” (Friedman, 1956 [1969: 95]). La Dm
está vinculada con la velocidad del dinero. Además la relación de
causalidad va de MV → PY (Friedman y Schwartz 1963).
 Distingue entre subidas de precios de una sola vez y un incremento
sostenido de todos los precios durante un largo plazo. La primera
está provocada por un incremento en salarios, impuestos, una mala
cosecha, etc, y por tanto independiente de la oferta monetaria. La
segunda (inflación) solo puede tener como causa el aumento de la
cantidad de dinero.
 Es decir, para Friedman (1979, 11), “la inflación es, siempre y en
todo momento, un fenómeno monetario” (no es un fenómeno de
costos, de factores estructurales o de excesos de demanda
agragada postulados por los keynesianos). La inflación la ocasiona el
banco central que maneja el crecimiento de la oferta de dinero por
encima del crecimiento del producto real. 11
http://www.scielo.org.mx/pdf/ineco/v73n288/v73n288a1.pdf
ENFOQUE MONETARIO (INFLACIÓN DE DEMANDA) (cont.):
 Pero a diferencia de los clásicos, el incremento de la oferta
monetaria genera cambios en variables nominales (nivel de
precios) y reales (tipo de interés real, consumo, inversión,
producción, empleo). Los primeros son permanentes, los
segundos son transitorios. Esto hace que a corto plazo no
exista una relación definida entre ΔOm y los precios.
 Es decir, la inflación depende también de los tipos de interés
de los activos alternativos al dinero (renta fija, renta variable…),
las expectativas de los agentes, los ingresos actuales y futuros
de los agentes económicos y el uso que hagan de esas rentas
(ahorro y consumo en el tiempo). Esos tres factores determinan
la demanda de dinero (Friedman, 1956 [1969]: 100-2].
 No obstante, Friedman considera que la Dm y la velocidad del
dinero son estables (Friedman 1956 [1969]).
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 LARGO PLAZO: Para los monetaristas sí existe la dicotomía
clásica (variables nominales y reales por separado). A LP la oferta
agregada es vertical (la economía se encuentra en equilibrio de
pleno empleo, a la tasa natural de desempleo (curva de Phillips
vertical a largo plazo). Cualquier cambio en la cantidad de dinero
sólo produce mayor inflación. Por eso consideran que la inflación es
un fenómeno monetario.
∆Om → i → ∆C, ∆Inv → ∆Da →
• A corto plazo ∆Y
• A largo plazo con pleno empleo ∆π →
Y volviendo a su posición inicial. Es
decir ∆Om → ∆π
13
 For Friedman, “The only cure for inflation is to reduce the rate at
which total spending is growing”. “There is no way of slowing down
inflation that will not involve a transitory increase in unemployment,
and a transitory reduction in the rate of growth of output. But these
costs will be far less than the costs that will be incurred by permitting
the disease of inflation to rage unchecked”.
 How economic policy should manage total spending? His work was
important in forming the consensus that monetary actions have more
sizable and reliable effects on aggregate spending than fiscal actions.
His reasoning behind this was straightforward: “A budget deficit is
inflationary if, and only if, it is financed in considerable part by printing
money”—that is, only if fiscal actions are accommodated by the
monetary authorities.“[M]onetary policy is an appropriate and proper
tool [when] directed at achieving price stability or a desired rate of
price change.” This principle underlies the monetary policy framework
14
of major economies today.
Nelson (2007) Milton Friedman on Inflation. https://files.stlouisfed.org/files/htdocs/publications/es/07/ES0701.pdf
 Friedman’s monetary view of the inflation process led him to
dismiss “incomes policy”— i.e., direct controls on wages and
prices—as an alternative or supplement to monetary policy in
fighting inflation.
 Friedman admitted that velocity may vary a little but not very
much so it can be treated as fixed (Friedman (1956 [1969]).
 According to this view, inflation in the U.S. should have been
about 31 percent per year between 2008 and 2013, when the
money supply grew at an average pace of 33 percent per year
and output grew at an average pace just below 2 percent.
 Why, then, has inflation remained persistently low (below 2
percent) during this period? 15
https://www.stlouisfed.org/On-The-Economy/2014/September/What-Does-Money-Velocity-Tell-Us-about-Low-Inflation-in-the-US
Declining Velocity
The issue has to do with the velocity of money, which has never been constant,
as can be seen in the figure below. If for some reason the money velocity
declines rapidly during an expansionary monetary policy period, it can offset the
increase in money supply and even lead to deflation instead of inflation.
V=PQ/M=PIB/BM
increase in money demand has

slowed down the velocity of money
16
Federal Reserve Bank of St. Louis, St. Louis Adjusted Monetary Base [BASE], retrieved from FRED, Federal Reserve Bank of St.
Louis https://research.stlouisfed.org/fred2/series/BASE/, April 9, 2015.
How (un)stable is velocity?
V can said to be a function of the expectations of future growth in M and
these expectations are determined by what monetary policy regime is in
place. During the Great Moderation (since 1980s), there was a clear inverse
relationship between M and V. So when M increased above trend V would
tend to drop and vice versa. This is not really surprising if you take into
account that the Federal Reserve during this period de facto was targeting a
growth path for nominal GDP (PY). La correlación entre ∆𝑀 y ∆𝑣 es -1.
MZM (money with zero maturity, equivalente a la M3) St. Louis Fed’s measure of the money supply.
17
https://marketmonetarist.com/2012/03/18/how-unstable-is-velocity/
ENFOQUE NO MONETARIO (INFLACIÓN DE DEMANDA):
 KEYNESIANOS: Para Keynes y los keynesianos no hay
dicotomía (no neutralidad del dinero).
 Keynes rompe con la tradición clásica basada en la ley de Say,
según la cual todo crecimiento de la oferta es absorbido por un
crecimiento igual de la demanda. En su lugar se refiere a la
insuficiencia de la demanda efectiva como causa principal de las
fluctuaciones económicas. Asumen que la economía no se
encuentra en el pleno empleo.
 Por eso no comparten la teoría cuantitativa del dinero neoclásica,
al considerar que la demanda monetaria puede variar
dependiendo del ciclo económico (Y) y de la expectativa de
ganancia futura que pueda tener un agente (tipo de interés).
 La inflación se produce cuando la demanda agregada efectiva de
bienes y servicios es mayor que la oferta disponible. Es decir, la
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inflación es un proceso asociado al pleno empleo.
Teoría Keynesiana de la preferencia de la liquidez
Demanda de dinero:
(𝑀/𝑃)𝑑 = 𝐿 ( 𝑖 − , 𝑌 + )
Esta expresión, conocida como la preferencia por la liquidez del
dinero, sostiene que la persona desean retener una cantidad de
balances reales de dinero (Md/ P), en función de la tasa de interés
(i) y el ingreso real (Y). La demanda de dinero está relacionada
negativamente con la tasa de interés y positivamente con Y.
Podemos expresar la demanda de dinero de la siguiente manera:
P/Md = 1/L(i, Y)
En equilibrio Ms = Md = M
Por lo tanto, si regresamos a la ecuación de intercambio, MV= PY y
la rescribimos de esta manera: V= PY/M
Sustituimos P/M por 1/L(i,Y)
Teoría Keynesiana de la preferencia de la liquidez
Entonces, tenemos la siguiente expresión:
V = PY/M = Y/ L( i, Y)
Para Keynes y los postkeynesianos, la velocidad del dinero no es
constante, sino que fluctúa con la tasa de interés (están relacionadas
positivamente).
An increase in interest rates induces people to decrease real
money balances for a given income level, implying that velocity
must be higher. Thereby explaining its pro-cyclical
nature. (Interest rates rise during expansions and fall during
recessions.)
↑∆i ↑∆v
Para el enfoque monetario de la
La curva de oferta agregada se va
inflación de demanda, el incremento
haciendo vertical cuando nos acercamos
de la cantidad de dinero, disminuye el
a niveles de pleno empleo (es elástica en
tipo de interés y eleva la demanda
aquellos niveles de producción lejanos al
agregada. Bajo el supuesto de pleno
de pleno empleo, y a medida que nos
empleo (la oferta es rígida al nivel de
vamos acercando al mismo, se torna
pleno empleo), ΔDa impacta
inelástica). Aquí el incremento de la
únicamente en el nivel general de
demanda agregada provoca mayor
precios.
inflación.
21
http://www.alipso.com/monografias3/resumen_de_economia_perez_enri_cap_13_4ta_parte/
ENFOQUES NO MONETARIOS (INFLACIÓN DE OFERTA):
 POSTKEYNESIANOS: Asumen que la oferta monetaria es
parcialmente endógena debido a la creación de dinero de los bancos
(POLLIN, 1991 y GALINDO, 1992), por lo se que escapa del control
de las autoridades monetarias, cuyo papel consistiría en intentar
asegurar que haya suficiente dinero en la economía para evitar que
la producción se vea restringida por la falta de liquidez.
Para ellos el origen de la inflación no proviene del dinero, sino de los
costos de producción y, especialmente, de los salarios. La política
monetaria (medidas de restricción monetaria para luchar contra la
inflación) no sirve de mucho. En su lugar, para contener la inflación
plantean la necesidad de diseñar una política de rentas que
modere los salarios.
 NUEVOS MODELOS KEYNESIANOS: Woodford (2003), Gali (2008) and
Christiano et al. (2010), afirman que la inflación es provocada por
incrementos en los costos marginales esperados en el futuro. 22
http://www.revistasice.com/CachePDF/BICE_2658_13-22__8A7697EE01D585EE4FB6289BC21E6526.pdf
POSTKEYNESIANOS. La pugna por la distribución del ingreso: La
inflación se debe al aumento de los componentes de los costos (salarios,
tarifas, tipos de cambio, precios de los insumos importados o márgenes
de utilidad). La presión de los costos materializada por la pugna
distributiva puede provenir de presiones capitalistas para elevar los
márgenes de utilidad o de pujas salariales por presión de los sindicatos.
En muchos países en desarrollo cuando los precios suben, los salarios
no lo hacen de inmediato. Al ser menor el aumento de los sueldos en
comparación con la inflación, se produce una transferencia neta del
ingreso de los trabajadores que viven de un sueldo fijo a favor de los
capitalistas que dominan la producción y fijan los precios. El factor
trabajo reacciona con retraso y cuando por fin logra una compensación
salarial, ya ha sido despojado de buena parte de su ingreso. El ajuste
salarial es tardío y no compensa la pérdida del poder adquisitivo.
Kalecky(1943), Holzman(1950), Aujack(1954), Diamand(1973), Jackson y
Turner(1975), Rowthorn(1977),Weisskoff y Rosemberg(1981), Marglin(1984),
23
Bacha(1987), Amadeo y Camargo(1989), Heyman(1990).
 POSTKEYNESIANOS: Veamos un modelo que muestra a la
inflación como un subproducto de la lucha entre empresarios y
trabajadores por la distribución del ingreso (conflicto por la
distribución del ingreso).
 Siguiendo a Herr (2013), la ecuación de inflación habitual en los
modelos Postkeynesianos proviene de las Teoría del valor del dinero
de Keynes (1930). La renta nacional (Y) en una economía cerrada y
sin sector público se divide entre salarios (W) y beneficios (B).
Y=W+B. Profits (B) equal physical capital stock (K) multiplied with the
price level (P) and the profit rate (q): B=qPK
 El PIB nominal es igual al PIB real por el nivel de precios (𝑌 = 𝑌𝑟 𝑃)
𝑊 𝑞𝑃𝐾
 Entonces 𝑌𝑟 𝑃 = 𝑊 + 𝑞𝑃𝐾. Despejando P: 𝑃 = +
𝑌𝑟 𝑌𝑟
 Los precios están en función del valor unitario del trabajo y de los
beneficios por unidad producida.
24
https://www.ipe-berlin.org/fileadmin/institut-ipe/Dokumente/Working_Papers/ipe_working_paper_23.pdf
https://www.mundosigloxxi.ipn.mx/pdf/v03/10/04.pdf
 Si dividimos w/𝑌𝑟 numerador y denominador por el input trabajo (L).
𝑊/𝐿 𝑤
 = , obtenemos el salario nominal por trabajador y la
𝑌𝑟 /𝐿 𝑦
𝑤 𝑞𝑃𝐾
productividad del trabajo. Así 𝑃 = +
𝑦 𝑌𝑟
 Esta ecuación nos define una simple estructura de costos de la

𝑞𝑃𝐾
economía. Tomando diferencias 𝑃ሶ = 𝑤ሶ − 𝑦ሶ + 𝜏ሶ (con τ = )
𝑌𝑟
 Una variante utilizada en diversos trabajos (ej. Thirlwall 1989).

𝑝𝑑 =w−y+τ
La inflación interna (Pd son los precios internos) está dada por la diferencia
entre el crecimiento de los salarios nominales (w) y el crecimiento de la
productividad del trabajo (y) más los cambios en margen empresarial sobre
los costos laborales (mark-up= (τ). La inflación se produce cuando el
crecimiento de los salarios es mayor al incremento de la productividad, o
cuando los empresarios (mercados imperfectos) aumentan su mark-up 25
POSTKEYNESIANOS FUNDAMENTALISTAS: Esta relación es
formalizada por Davidson (1994) al señalar que existen tres tipos
de inflación:
1. Inflación de rendimientos decrecientes. La expansión de la
actividad económica puede ocasionar inflación por la
presencia de rendimientos decrecientes a escala en su sentido
convencional: conforme la economía se aproxima al pleno
empleo se contratan trabajadores cada vez menos capacitados
y se pone en uso capital anticuado al que sólo se le
conservaba como reserva para casos especiales (p. 143).
En el largo plazo, mejoras en la tecnología, capacitación,
educación e incrementos del capital disponible por trabajador
pueden eliminar este tipo de inflación (p. 144).
26
2. Inflación de ganancias. Ocurre cuando los empresarios
consideran que existen las condiciones apropiadas para elevar
los márgenes de comercialización, lo que les permitirá aumentar
la tasa de inversión (Davidson, 1994, p.144).
3. Inflación de salarios. Ocurre cuando los incrementos salariales
son superiores al crecimiento de la productividad del trabajo
(Davidson, 1994, p. 144). En la medida en que los asalariados
vean su bienestar en relación con el ingreso de otros, las
demandas salariales se convierten en una lucha de los grupos de
menor ingreso por acercarse a los de mayores ingresos, al tiempo
que estos últimos desean mantener o ampliar la distancia
(Davidson, 1994, p. 145).
27
 Estos tres tipos de inflación suelen retroalimentarse
(relacionado con el fenómeno de causalidad acumulativa de
Myrdal, característico de los modelos post-keynesianos),
generando las condiciones para una espiral inflacionaria que
se mantendrá mientras dure la expansión de la actividad
económica (Davidson, 1994, 146).
 En este contexto, las políticas de precios y de renta son las
más idóneas para frenar una espiral inflacionaria, a través de la
contención de las demandas salariales y los aumentos en los
márgenes de comercialización.
 La rigidez salarial y una política clara para frenar inflación
reducen el grado de incertidumbre. (Davidson, 1994, pp. 155-
157).
28
ENFOQUES NO MONETARIOS (INFLACIÓN DE OFERTA) (cont.):
 ESTRUCTURALISTAS: La inflación se debe a las
heterogeneidades estructurales de la economía que generan
estrangulamientos e inflexibilidades de la oferta agregada para
adaptarse con rapidez a los cambios de la demanda.
Las heterogeneidades estructurales pueden ser provocadas
por factores institucionales, mercados oligopólicos y
segmentados, falta de capacidad e iniciativa empresarial, alta
concentración del ingreso, riqueza y poder, y rigideces en los
sectores externo, público y laboral.
Los procesos inflacionarios latinoamericanos tienen sus raíces en ciertas
características y rigideces de los sectores externo y agrícola. Este análisis
de la inflación se denominó estructuralista porque coloca en primer plano
algunas de las particularidades de la estructura productiva de economías
como las latinoamericanas (RODRÍGUEZ, 1983: 191)
Prebish(1948), Olivera(1967), Assael(1990), Pazos(1990), Sunkel(1990)
29 y
Ramos(1991).
SINTENSIS NEOCLÁSICA: Price Adjustment Function
(Samuelson 1947) Paul Wachtel, Macroeconomics
• Natural rate or long-run equilibrium level of output (Y*) is a point
where there would be no pressures for either quantity adjustment or
price adjustments.
• In general, inflationary pressures emerge and increase with the
size of the gap between actual output Y and Y*.
• The price adjustment function relates the inflation rate to the gap
between actual output and the long-run equilibrium level of output:
π = γ (Y - Y*) (1)
• When Y = Y *, there are not inflationary pressures.
• Si el nivel de Y>Y*, habrá presiones inflacionarias positivas mientras
que si Y<Y* habrá presiones desinflacionarias
• The price adjustment equation reflects the influence of both 30
supply and demand phenomenon on the inflation rate.
Augmented Price Adjustment Equation
Paul Wachtel, Macroeconomics
 An increase in expectations of inflation on the actual rate of
inflation can be seen by envisioning a particular price or wage
negotiation.
 The price or wage agreement that emerges from the negotiations will be
higher if both parties expect more inflation to take place in the overall
economy.
 Thus, the inflation rate that emerges from price setting
throughout the economy will depend on both supply and
demand conditions and the decision-makers’ expectations
of inflation.
 This suggests the following specification of the expectations-
augmented price adjustment equation:
π = γ (Y - Y*)+ βπe
 where πe is the expected rate of inflation and the coefficient
31 β
measures the impact of expectations on the inflation rate.
INFLACIÓN Y EMPLEO - Curva de Phillips
(Dornbusch, Fischer, Macroeconomics, 10ª ed, Ch6)
 En 1958, William Phillips publicó un estudio sobre el

comportamiento de los salarios en UK entre 1861 y 1957.
 La curva de Phillips muestra una relación inversa entre la
tasa de desempleo y la tasa de crecimiento de los salarios
(tasa de inflación de los salarios). A menor tasa de
desempleo, mayor inflación y viceversa.
 La curva de Phillips sugiere que una política dirigida a la
estabilidad de precios promueve el desempleo. Por tanto, cierto
nivel de inflación es necesario si se quiere disminuir el
desempleo.
32
Si Wt son los salaros en t y Wt-1
los salarios en t-1, la tasa de
cambio de los salarios gw:
Wt  Wt 1
gw 
Wt 1
Si u* es la tasa natural de
desempleo, la curva de Phillips
se puede formalizar:
g w   (u  u*)
donde ε mide la respuesta de
los salarios al desempleo.
Price Adjustment Function

pero con desempleo en vez
de Y
Esta ecuación indica que los

salarios disminuyen cuando las
tasas de desempleo exceden la
tasa natural (u>u*).
La diferencia entre el
desempleo y la tasa natural, (Dornbusch, Fischer, Macroeconomics, 10ª ed, Ch6)
u – u*, se llama brecha del 33

desempleo.
Curva de Phillips
Source: Bureau of Labor

Statistics.
Note: Inflation based on
the Consumer Price Index
Phillips curve fitted to data for the United States from 1961 to 1969. The close
fit between the estimated curve and the data encouraged many economists,
following the lead of Paul Samuelson and Robert Solow, to treat the Phillips
curve as a sort of menu of policy options.
34
https://www.econlib.org/library/Enc/PhillipsCurve.html
La curva de Phillips a largo plazo y la teoría
de las expectativas racionales
 En los años 70, la curva de Phillips comenzó a ser criticada debido al
aumento simultáneo de desempleo e inflación (fenómeno conocido como
estanflación), promovido por perturbaciones en la oferta agregada, como
consecuencia de la crisis del petróleo de 1973. Para explicar las
inconsistencias en la curva de Phillips como la estanflación, Edmund
Phelps and Milton Friedman se basaron en las expectativas
racionales (Robert Lucas, Thomas Sargent y Robert Barro): los agentes
tienen expectativas sobre la inflación futura que no tienen por que coincidir
con la inflación actual. Ellos están interesados en fijar sus salarios de
acuerdo a la inflación esperada (𝑔𝑤 ≥ 𝜋 𝑒 )
Por tanto: (𝑔𝑤 − 𝜋 𝑒 = −𝜀 𝑢 − 𝑢∗ y si suponemos que el salario real es
constante entonces 𝑔𝑤 = 𝜋 y 𝜋 − 𝜋 𝑒 = −𝜀(𝑢 − 𝑢∗ )
A partir de estos conceptos, elaboraron la teoría de la tasa natural de
desempleo (Edmund Phelps and Milton Friedman), que permitía distinguir
entre una curva de Phillips de corto y de largo plazo.
35
http://es.wikipedia.org/wiki/Curva_de_Phillips y https://www.econlib.org/library/Enc/PhillipsCurve.html
The expectations augmented Phillips curve
 Represents a trade-off relationship between the inflation
rate and the unemployment rate (or output gap) for each
level of expected inflation.
The expectations augmented Phillips curve:
A flat trade-off curve is shown for

each level of the expected
inflation rate, πe.
Over time, the expected rate of
inflation changes and the longer-
run trade-off curve is given by
the steeper line shown by ABC in
Figure (a long-run trade-off).
36
Expectations augmented Phillips curve
 A characteristic of long-run equilibrium is that actual and
expected inflation rates are equal:
π = πe
 The long-run equilibrium condition is obtained from the
short term Augmented Price Adjustment Equation:

π = γ (u - u*)+ βπe  (u  u*)
1 
C/P L/P (π = πe)
 The slope coefficient on the output gap is γ /1-β ; since

β<1, the long-run trade-off is steeper than the short-run
curves.
 But we are supposing that expectations do not have a full
impact on inflation (β<1).
37
Natural rate Phillips curve
 With a full impact of expectations (β=1), the expectations-
augmented price adjustment equation should be written as:
   (u  u*)   e
 the long-run trade-off by substituting the long-run condition (π =

πe ) y por tanto u=u* (si la inflación real y la esperada son
iguales, el desempleo estará en la tasa natural)
 Esto es equivalente a decir que Y=Y*
 In the long run, after all inflation adjustments have taken place,
there is no trade-off between output and inflation; output
simply returns to the natural level, Y*.
 The relationship between inflation and the output gap or
unemployment rate is shown in Figure 10.
38
Non-Accelerating Inflation Rate of
Unemployment (NAIRU)
The long-run trade-

off is given by the
vertical line: no
 2e existe relación entre
 1e inflación y
 0e
desempleo (nivel de
desempleo natural)
39
6.1. Sources of Inflation
6.1.1. Hyperinflation and chronic Inflation
6.1.3. Other sources of Chronic Inflation
 Wage Inertia
 Exchange Rates and the Terms of Trade
 The Frequency of Price Adjustment
 Food Prices
 Time Inconsistency and the Inflationary Bias
40
6.1.1. Hyperinflation and Chronic Inflation
Definition: inflation that is very high or "out of control".
• The International Accounting Standards Board, describes it
as "a cumulative inflation rate over three years approaching
100% (26% per annum compounded for three years in a row)",
• Cagan's criterion: Hyperinflation is defined as an inflation rate
of at least 50% per month, or 12,975% per annum.
• Rule of thumb: a general price level rise by 5 or 10% or even
more every day.
Three main features of hyperinflation (Végh 1992):
 It typically has its origin in large fiscal imbalances monetized
by the Central Bank.

 Nominal inertia tends to disappear. Most wages and prices
become indexed to a foreign currency. Transactions are

conducted in a foreign currency.
41
 It brings about a chaotic social and economic environment.
Las hiperinflaciones modernas
Episodio Duración Inflación Inflación Inflación
(meses) Acumulada (%) Mensual Mensual
Promedio (%) Máxima (%)
Austria (Oct. 1921 – Ago. 1922) 11 6890 47 134
Rusia (Dic. 1921 – Ene. 1924) 26 12.400.000 57 213
Alemania (Ago. 1922 – Nov- 1923) 16 1,02 x 1012 322 32.400
Polonia (Ene. 1923 – Ene. 1924) 13 69.800 81 275
Hungría (Mar. 1923 – Feb- 1924) 12 4.300 46 98
Grecia (Nov. 1943 – Nov. 1944) 13 47.000.000.000 365 85.500.000
29 15
Hungría (Ago. 1945 – Jul. 1946) 12 3,81 x 10 19.800 41,9 x 10
China (Feb. 1947 – Mar. 1949) 26 415.000.000 80 920
Bolivia (Abr. 1984 – Sep. 1985) 18 97.282 47 183
Nicaragua (Jun. 1986 – Mar. 1991) 58 11.895.866 38 261
Argentina (May. 1989 – Mar. 1990) 11 15.167 58 197
Brasil (Dic. 1989 – Mar. 1990) 4 693 68 81
Congo (Oct. 1991 – Sep. 1992) 12 7.689 44 114
Congo (Nov. 1993 – Sep. 1994) 11 69.502 81 250
Angola (Dic. 1994 – Jun. 1996) 19 62.446 40 84
42
Braun, Llach: Macroeconomía argentina
Table 23-2 High Inflation in Latin America, 1976-2000
Average Monthly Inflation Rate, (%)
1976- 1996-
1980 1981-1985 1986-1990 1991-1995 2000
Argentina 9.3 12.7 20.0 2.3 0.0
Brazil 3.4 7.9 20.7 19.0 0.6
Nicaragua 1.4 3.6 35.6 8.5 0.8
Peru 3.4 6.0 23.7 4.8 0.8
Aurora del Álamo
http://campus.usal.es/~ehe/anisi/MIyII/Macro_II/Docencia/
Temas_Semanales/Cp23.ppt
Example of hyperinflation: Zaire.
 A deep and worsening political crisis led to a drastic
increase in government expenditure, and drop in tax
revenue, worsening the fiscal deficit that had to be
financed by money creation.
 1980s, inflation averaged 60% per annum. In 1993 surged
to 4.500%, 9.800% in 1994 and 12.850% in September
1994. At the peak of the hyperinflation process, in
December 1993, inflation rose to almost 240% a month
(altamente correlacionada con la oferta monetaria. Figura
6.1a)
 During the whole period, domestic prices were
increasingly set in foreign currency (USD or BFr).
 Figure 6.1b: during the whole episode, the monthly rate of
depreciation of the parallel exchange rate remained
44
closely correlated with the inflation rate.
Figure 6.1a
Zaire: Money Growth and Inflation, 1990-96
Inflation and Money Growth

250
1/
Inflation
200
150
100
Currency outside banks
50
-50
1990 1991 1992 1993 1994 1995 1996
Source: Beaugrand (1997).

1/ Monthly rate of change of the stock of currency outside banks.
45
Figure 6.1b
Zaire: Inflation and Exchange Rate Depreciation, 1990-96
Inflation and Exchange Rate Depreciation

500
2/
400
Zaïres per U.S. dollar (parallel market)
300
200
Inflation
100
-100
1990 1991 1992 1993 1994 1995 1996
Source: Beaugrand (1997).

2/ Parallel exchange rate in terms of old zaïres. The new zaïre was introduced in October 1993 at a parity
of NZ=Z 3,000,000; later data have been rescaled accordingly. 46
CHRONIC INFLATION:
 Fiscal imbalances are often less acute (agudos)
in the short run than those observed during
episodes of hyperinflation; in this case is more
difficult to mobilize political support for reform.
 There is a high degree of inflation inertia resulting
from widespread indexation of wages and
financial assets.
 The public is often skeptical of new attempts to
stop inflation, particularly when there is a history of
failed stabilization efforts.
 Lack of credibility can be a source of inertia.
47
Inflación crónica en el Ecuador hasta la dolarización
http://www.zonaeconomica.com/
ecuador/evolucion-
inflacion/inflacion
48
Sin embargo, el déficit fiscal del Ecuador no parece ser la
causa de la inflación crónica que sufría el país.
superávit
déficit
49
http://www.eclac.org/publicaciones/xml/2/41952/2010-41-Ecuador-W5.pdf.pdf
Ecuador, oferta monetaria (M1) e inflación
250
240
230
220
210
200
190
180
170
160
150
140
130
120
110
100
90
80
70
60
50
40
30
20
10
0
INFLACION TV M1
Banco Central del Ecuador

50
La creación de moneda circulante sin respaldo y la masiva salida
de capitales, llevaron a una acelerada devaluación del sucre,
retroalimentando el proceso inflacionario (INFLACION CRONICA)
Sucre/$
51
http://www.uasb.edu.ec/UserFiles/381/File/COTIZACIONES%20DE%20LAS%20MONEDAS%201990-2009____.pdf
 In countries where the tax collection system, capital markets,
and institutions are underdeveloped, fiscal imbalances are
often at the root of hyperinflation and chronic inflation.
 Governments often have no other option but to monetize their
budget deficits.
• Sargent and Wallace [1981, 1987] and Liviatan [1983] have
shown, there may be two equilibrium when a government
finances its deficit by printing money (reflection of a Laffer
curve) which imply that an economy may be stuck in a high
inflation equilibrium when, with the same fiscal policy, it could
be at a lower inflation rate.
Bruno and Fischer (1990): simple model in which money is the
only source of deficit financing. Under rational expectations the
high inflation equilibrium is stable and the low inflation equilibrium
unstable; under adaptive expectations may be the opposite.
Adaptación de Agénor del modelo de Bruno y Fisher (1990)
 Suppose: real money demand, md, is a function of the
expected inflation rate, a. Under perfect foresight expected
and actual inflation rates are equal,  = a.
 Money demand (función exponencial)
m d  m e 
o
(1)
 En forma semilogarítmica: ln( m d
)  ln( mo )  
=inflation elasticity of money demand
 Sort term Equilibrium of the money market:

m = ms = md.
ln( m / m0 )
This implies:    (2)

 Along an equilibrium path, inflation () and real money
balances (m) are negatively related.
 It defines a downward-sloping curve in the -m space,
denoted MM (for money market equilibrium) in Figure 6.2.
Dynamics of the inflationary process:
 Real fiscal deficit (d): d = dA + ,  > 0, (3)
dA: autonomous component of the deficit;

: measure Olivera-Tanzi effect (rise in the inflation rate lowers the real
value of tax revenue as a result of the lag involved in collecting taxes),
increasing the fiscal deficit (consideramos que el efecto Patinkin=0 , i.e. que
los gastos públicos están indexados a los precios).
 Deficit must be financed by seigniorage revenue:
M M M
deficit(d )  señoriage    m (4)
P M P
d
Despejando:   where μ : rate of growth of the nominal money stock.
m
m = M/P is the real money balances.

54
(ver tema 3)
 Rate of change of real money balances by
definition: m M P d
 -        (5)
m M P m

.
In steady state with m/m = 0,  =  (crecim. Stock nominal del
dinero = tasa de inflación)
 Sustituyendo 3 (d = dA + ) en 5 (real money balance), in
steady state:
dA
 (6)
m 
 Which implies that inflation and real money balances are
negatively related in long term equilibrium (DD in figure 6.2).
 When π→  , m → and when π →0, m→ ,
 DD represents only a steady–state relationship between m
and π. 55
 Economy moves along the money market
equilibrium in the short run (MM);
 MM intersects DD only when the economy reaches
its long-run equilibrium position (constant level of
real money balances Δm/m=0).
 MM and DD may or may not intersect, depending on
the size of dA (autonomous component of the
deficit).
Figure 6.2 illustrates three cases depending on dA :
 two equilibrium, corresponding to curve DD;
 one equilibrium, corresponding to curve D´D´;
 no equilibrium, corresponding to curve D´´D´´.
Whether the long-run equilibrium is unique depends

56
on the size of dA.
Figure 5.2a
The Seignorage Laffer Curve and the High-Inflation Trap
At any time the economy is located along MM (short

m
m0 M
term equilibrium).
D D' D''
MM intersects DD only when the economy reaches
its long-run equilibrium.
In A, B and B’ : constant level of real money balances
mH
B Δm/m=0.
F
A
D''
D' (d A=d Am)

mL D
B' M
 C
L  max H 
57
El ingreso del gobierno por señoriage (𝝅m) no es lineal
 Suppose for simplicity that inflation share  = 0
 In steady state, 𝜋 = 𝑑𝑎 /𝑚 → 𝑚 = 𝑑𝐴. (m es el ingreso del
gobierno por señoriaje (inflation tax) en el estado estacionario).
Sustituyendo m por (𝑚𝑑 = 𝑚0 𝑒 −𝛼𝜋 ) 𝑚0 𝑒 −𝛼𝜋 = 𝑑𝐴
When 0, mm0 y dA 0.
 As inflation rises, real money demand falls (md = m0exp(-)) (eq.
1). But the relationship is nonlinear, because of the exponential
form of the money demand function:
 when inflation begins to rise from 0 (∆), real money balances

fall by relatively little (m), and seigniorage revenue from the
inflation tax (∆m) increases at first (porque el ∆> m)
 As inflation continues to rise, real money balances begin to fall
at a rate faster (m) than the rate at which inflation rises.
seigniorage revenue from the inflation tax (m) decreases 58
(porque el ∆ < m).
 Thus, after a phase during which seigniorage revenue (m)
increases (at a decreasing rate), it starts falling (at an
increasing rate) and eventually tends to zero as  goes to
infinity.
 These results define a concave relationship: seigniorage
Laffer curve associating the steady-state , and m = dA.
 Figure 6.2: for some level of dA, there are two corresponding
rates of inflation, one low (B) one high (B’).
 MM and DD curves in that case intersect twice.
 Uniqueness occurs only at the optimal inflation rate, max:

maximizes steady-state seigniorage (A).
59
Figure 5.2b
The Seignorage Laffer Curve and the High-Inflation Trap
Al nivel de max el
steady-state gobierno obtiene el
seigniorage
revenue
máximo ingreso por
señoriage (inflation tax)
 m=d
A
A
d Am
B B'
d*A
steady-state
inflation rate
L  max H 
60
Para ciertos nivel de déficit autónomo existen dos posibles tasas de inflación.
 The optimal inflation rate (revenue-maximizing rate of
inflation) is reached:
 (m) m reescribiendo m / m
 m   0 (7)   m /  1
   / 
m/: elasticity of real money demand with respect to inflation.
 La tasa de inflación que maximiza los ingresos del gobierno se
alcanza cuando la elasticidad de la demanda real de dinero
respecto a la inflación es igual a 1.
 When  < max, increases in  raise revenue from the inflation

tax: (estamos en la parte creciente de la curva d(m) / d > 0
and m/ < 1 por 7).
 When  > max, increases in  decrease revenue from the
inflation tax: (estamos en la parte decreciente de la curva
d(m) / d < 0 and m/ > 1 también por 7). 61
 Substituting 1 (𝑚𝑑 = 𝑚0 𝑒 −𝛼𝜋 ) in 7, we obtain the Optimal
inflation rate:
 (m)  (e  )
 0 derivando
e  e  0
 
max = 1/ (8)
La tasa de inflación óptima esta inversamente relacionada con

 (inflation elasticity of money demand).
 Substituting 8 in 1 and using 6 π= 𝑑𝐴 /(𝑚 − ϕ) with  = 0 ) we
get the level of autonomous deficit corresponding to max :
m0e 1
d Am 

Is the solution stable?
 Equilibrium with a lower inflation rate than max is unstable.
 Suppose that the economy’s initial position is at point F on
MM. For a given level of . 62

Figure 5.2a
The Seignorage Laffer Curve and the High-Inflation Trap Curva DD
En F: mC/P>mL/P , entonces m / m  0 , m disminuye
m
m0 M ln( m / m0 ) entonces π aumenta
D D' D'' Si =0, como  

The dynamics move toward point B’.

mH
B
En C: mC/P<mL/P , entonces m / m  0 , m aumenta
F para un nivel dado de π
A ln( m / m0 )
D''
 
D' (d A=d Am) 
mL D Entonces π disminuye
B' M
 C The dynamics move toward B’
L  max H 
A la izquierda de B las fuerzas son como en C, por tanto el punto asociado

con la menor tasa de inflación es inestable.
 In point B, any disturbance or exogenous shock will lead
the economy away from low inflation equilibrium point.
 But, high inflation equilibrium is stable (B’).
 Given the nature of the adjustment process under perfect
foresight, a country can be stuck in a situation in which
inflation is persistently high: inflation trap (Bruno and
Fischer, 1990).
 Any equilibrium characterized by  > max is inefficient: the
same amount of revenue could be collected at a lower
inflation rate.
 La idea de una trampa de inflación podía ser consistente
con algunos episodios de inflación alta y crónica observados
en América Latina en los 70s y 80s (Agenor y Montiel, 1999,
Ch 9).
64
What can governments do to move the economy away from
an inefficient position?
 Change either dA (déficit autónomo) or  (rate of growth of the
nominal money stock), because both affect the position of the

economy along the seigniorage Laffer curve.
 For instance, a credible reduction in the money growth rate
() may shift MM and DD in such a way that the MM curve will
intersect the DD curve only once (o aumentar MM para
intersectar con la curva D’ D’).
 Figure 6.3: positive correlation between inflation and

seigniorage.
 Figure 6.4: positive correlation between inflation and broad
money growth.
 Although the relation does not appear to be close in either
case, which suggests that the relationship between inflation

and fiscal deficits or money growth is relatively weak.
Figure 5.3
6
Inflation and Seigniorage
(In percent of GDP, average 1990-95)
70
Peru
60
Nigeria
50
Inflation in consumer prices
Jamaica
40 Venezuela
Ghana
Zimbabwe Tanzania
30 Algeria
Côte d'Ivoire
Indonesia Philippines Colombia Costa Rica
20 India
Korea
Bolivia
Pakistan
10 Chile
Nepal Malaysia
Tunisia Morocco
Bangladesh Thailand
0
0 1 2 3 4 5 6 7
Seigniorage
Source: World Bank.
66
Figure 5.4
Inflation and Money Growth
(In percent per annum, average over 1980-95)
40
Nigeria
Venezuela
30 Ghana
Tanzania
Jamaica
Colombia
Zimbabwe
Costa Rica
20 Algeria
Chile
Morocco
Nepal
Pakistan
Philippines
India
10 Côte d'Ivoire
Bangladesh
Tunisia Indonesia
Korea
Panama Malaysia Thailand
0
0 5 10 15 20 25 30 35 40 45
Broad money growth
Source: World Bank.
67
INFLACION Y CRECIMIENTO DE LA OFERTA MONETARIA
Pero en
escala
logarítmica la
correlación
es mayor.
68
Mankiw:Macroeconomics, 4/e © by Worth Publishers, Inc.
Política monetaria e inflación
U.S. Inflation & Money Growth, 1960-2001
16
14
12
10
% per year
0
1960 1965 1970 1975 1980 1985 1990 1995 2000
inflation rate M2 growth rate inflation rate trend M2 trend growth rate
69
EEUU, INFLACION Y CRECIMIENTO DE LA OFERTA MONETARIA
70
Política monetaria e inflación
Argentina, Dinero y Precios.
300
2.0E+08
250
1.5E+08
200
1.0E+08 150
100
5.0E+07
50
0.0E+00
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05
M3 IPM
IPM= índice de precios mayoristas 71

However, in general the evidence suggest that the relationship
between fiscal deficits, money growth and inflation are relatively
weak, specially in the short run.
De Haan and Zelhorst (1990) and Karras (1994b): studied the link
between monetary growth and budget deficits in developing
countries. They demonstrated that only in a small number of cases, a
close positive relationship exist.
 Explanation: role played by expectations about future policy changes
(Kawai and Maccini, 1990): A large budget deficit today, may be
expected to be closed in the future through monetary or bond financing,
which may raise expected and actual inflation immediately or through a
cut in government spending, which may lead to an immediate fall in the
expected inflation rate (función de ajuste de precios aumentada).
Fischer, Sahay and Vegh (2002) and Catao and Terrones (2003)
detect a robust relationship between fiscal deficits and inflation in
high-inflation countries.
Ashra, Chattopadhyay, and Chaudhuri (2004) for India concluded that
there was no systematic relationship between budget deficits and 72
money growth.
Milo (2012) for Albania, Bulgaria, and Romania, found monetary
financing of government deficits are the main cause of money creation
and inflation in these countries.
Hoang Khieu Van (2014) analiza la relación entre déficit

presupuestario, crecimiento de la oferta monetaria e inflación en
Vietnam para el período 1995-2012. Encuentran que el crecimiento del
déficit presupuestario es autónomo, producido por shocks en otras
variables. Éste no tiene un impacto en el crecimiento de la oferta
monetaria, la cual si tiene un efecto positivo sobre la inflación. También
encuentran que la tasa de interés no es un instrumento efectivo en la
lucha por la inflación pero la inflación impacta positivamente en i.
∆d ≠> ∆M y tampoco a un ∆π. ∆M → ∆π
i no impacta en π, pero π impacta en i (causalidad π → i)
En lo que si parece que hay consenso es en la relación entre ∆M e ∆π

(Siebrits and Niedermeier (2004) for South Africa, Nina, Wojciech,
Georges and Geomina (2006) in Romania, l-Shagi and Giensen (2013) in
the US. 73
http://mpra.ub.uni-muenchen.de/54488/1/MPRA_paper_54488.pdf
Criticism also for public finance approach to
inflation.
Bailey (1956) questioned the use of the seigniorage approach as
a positive theory of extreme inflation. Because:
 taxation is an alternative to money creation;
 marginal cost of taxation is moderate relative to the welfare
costs of extreme inflation;
 high money growth (and therefore high inflation) is not
optimal.
Dornbusch, Sturzenegger and Wolf (1990) agree that inflation
trap may be of limited usefulness to understand episodes of
very high inflation or hyperflation. In such cases, “inflation…
reflects a state of fiscal chaos, rather than optimal public
finance”.
74
6.1.3 Other Sources of Chronic Inflation
In addition to fiscal deficits and money growth, other
factors that can affect the inflationary process in
the short run:
 Wage inertia.
 Exchange rates and the terms of trade.
 The frequency of price adjustment.
 Food prices.
 Time inconsistency and the inflation bias.
75
Wage Inertia
 Backward-looking wage formation mechanisms (e.g. wage
indexation on past inflation rates) can play an important role in
inflation persistence (inflación de oferta).
Model: economy produces home goods and tradable goods.

 The inflation rate, , is given by a weighted average of changes
in prices of both categories of goods:
 = N + (1 - ) ( + T*) 0 <  < 1, (9)
: share of home goods in the price index,

N: rate of change in prices of home goods,
𝜋 𝑇∗ : rate of change in prices of tradables (in foreign currency
terms),
: devaluation of the exchange rate. 76
 Changes in prices of home goods are set as a
mark-up (margen) over nominal wage growth, 𝑤, ሶ
and the level of excess demand for home goods,
𝑑𝑁 :
𝜋𝑁 = 𝑤ሶ + 𝛼𝑑𝑁 (10)
 En equilibrio, (el exceso de demanda dN=0) 𝜋𝑁 = 𝑤ሶ
 Nominal wage growth is determined through

indexation on past inflation as follows:
𝑤ሶ = 𝛾𝜋−1 , 0 <   1, (11)
with  = 1 denoting full indexation.
77
 Then Inflation (combining 9, 10 and 11):
 = -1+ dN + (1 - )( + T*), (12)

inflation inertia exists as long as  is positive.
 Agénor and Montiel (1999): experience of countries like Chile in the early
1980s and more recently Brazil has shown that backward-looking wage
indexation can contribute to inflation inertia.
 In some countries: frequency at which nominal wages are adjusted tends to
increase with the inflationary pressures generated by exchange rate
movements.
 On the contrary, Gómez (2003) “Higher central bank credibility and a
higher frequency of wage negotiations correspond to lower inflation
inertia and a lower cost of disinflation”.
 Exogenous shocks in the wage bargaining process could also exert
independent impulse effects on inflation. (ej.: una subida unilateral de los
salarios por el gobierno).
 This could persist over time in the presence of an accommodative monetary
policy. 78
Exchange rates and the terms of trade
 Nominal exchange rate depreciation can cause direct effects
on the fiscal deficit through two channels:
 by increasing the domestic-currency value of foreign
exchange receipts (ingresos de divisas extranjeras) by the
government and the foreign exchange outlays
(desembolsos); (I, G, depende cual de ellos es mayor)
 by reducing the revenue derived from ad valorem taxes on
imports. (E → J → Aranceles).
 As a result, changes in the nominal exchange rate affect fiscal
deficit and may affect the money supply and inflation.
 In addition, since depreciation raises the prices of import-
competing goods it may exert pressure on wages due to its
effect on the cost of living.
 This is likely to occur in a setting in which indexation 79
mechanisms are pervasive (dominantes).
Example: a devaluation-inflation spiral.
A country facing a sharp deterioration in competitiveness and a
large current account deficit. The policymakers decide to
devalue the exchange rate.
 Devaluation will increase both the domestic-currency price
of imported final goods as well as imported inputs. This

puts upward pressure on domestic prices.
 Increase in prices can be large enough to outweigh the
effect of the initial devaluation on competitiveness---

thereby prompting policymakers to devalue again.
 If wages are indexed on the cost of living, they will increase
also, putting further upward pressure on prices of

domestic goods.
 Evidence: Onis and Ozmucur (1990) for Turkey; Alba and
Papell (1998) for Malaysia, the Philippines, and Singapore.
 ΔE → ΔPJ → Δπ → ΔE nuevamente 80
 Similar process can be seen in countries where the official
exchange rate is fixed but the parallel market for foreign
exchange is large.
 Deterioration in external accounts leads agents to expect
a devaluation of the official exchange rate to restore
competitiveness.
 Such expectations will be translated immediately into a
depreciation of the parallel exchange rate.
 Because the parallel rate is a more adequate measure of
the marginal cost of foreign exchange, domestic prices

will tend to increase.
 This increase in prices will further erode competitiveness,
leading agents to expect an even larger devaluation of the

official exchange rate.
 (X-J-N) → expectations of Δe → Δe parallel ER → Δπ
Changes in the terms of trade
When government is directly involved in controlling exports
of a major primary commodity (p.e. petróleo), may have:
 direct effects on the budget;
 indirect effect through taxes on corporate profits and
domestic sales.
 A deterioration in the terms of trade would directly reduce
government revenue, increasing pressure for monetizing the

fiscal deficit (higher inflation in the present).
RRI → T → ΔM/P → Δπ
 Improvement in the terms of trade may also lead to higher
inflation in the future:

 if government spending has increased sharply in response
to temporary commodity price booms and;

 if G increases are difficult to reverse when commodity prices
fall. ΔRRI → ΔG → Δπ 82
The frequency of price adjustment
 When high inflation is associated with highly variable
inflation and uncertainty over the pricing horizon of price
setters, the frequency of price adjustment becomes
endogenous and tends to accelerate.
 Shortening of the adjustment interval (ajustes más
frecuentes en los precios) raises inflation, leading to a
further shortening of the adjustment interval.
 So price setters will be more and more opting to denominate
their prices in a foreign currency.
 Dornbusch, Sturzenegger, and Wolf (1990): increased
synchronization between domestic prices and the nominal
exchange rate as inflation rises in Bolivia, Israel, Argentina,
and Brazil.
83
Food prices
 In many developing countries food items comprise the
bulk of the goods included in consumer price indices.
 Consumer price index in Nigeria: food items
representing 69% of the total basket.
 So supply-side factors affecting food prices have
an important effect on the behavior of prices.
 Moser (1995): in Nigeria, rainfall (precipitaciones)
had a significant effect on the rate of price increases,
in addition to money growth and exchange rate
changes.
 Figure 6.6: close correlation between inflation in food
prices and inflation in consumer prices. 84
Figure 5.6
Inflation and Food Prices
(In percent per annum, average over 1980-95)
40
Nigeria
Ghana
30 Tanzania Venezuela
Colombia
Jamaica
Indonesia Costa Rica
20
Bangladesh
Tunisia Nepal Zimbabwe
Algeria
Côte d'Ivoire
Chile
Thailand
10 Philippines
Malaysia India
Morocco
Korea
Panama
0
0 10 20 30 40
Inflation in food prices
Source: World Bank.

85
Time inconsistency and the inflation bias
 Lack of credibility may impart an inflation bias to monetary
policy.
 This lack of credibility may result from the time inconsistency
problem faced by policy announcements: a policy that is
optimal ex ante may no longer be optimal ex post.
 Reason: policymakers are concern about inflation as a policy
goal and with the fact that inflation may carry benefits.
 Barro and Gordon (1983): policymakers are concerned about
both inflation and unemployment, with a loss function:
~2
L = (1/2)(y - y) + (/2)( - )
~ 2,  > 0, (13)
~ desired inflation
~ its desired level, : actual inflation, :
y: current output, y:
rate, : relative importance of deviations of inflation from its target value in
the loss function. 86
 The economy is characterized by an expectations-
augmented Phillips curve (Curva de oferta):
𝑦 = 𝑦𝐿 + ( − 𝑎) + 𝑢,  > 0, 𝑦𝐿 < 𝑦෤ (14)
yL: long-term level of output,
a: expected inflation,
 : slope of the Phillips curve,
u: disturbance term with zero mean and constant variance,
𝑦𝐿 < 𝑦:෤ ensures that the policymakers have an incentive to raise
output above its long-run value.
 Policymakers want private agents to expect low inflation, in order to

exploit a favorable trade-off between inflation and output.
 But the mere announcement of a policy of low inflation is not
credible, because policymakers have an incentive to renege
(incumplir) to increase output and reduce unemployment and private
agents understand this renege.
Result: inflation will in equilibrium be higher than it would be
otherwise; monetary policy suffers from an inflation bias. 87
• Substitute (14) in (13):
1 𝜃
𝐿 = 𝑦𝐿 + 𝛼 𝜋 − 𝜋 − 𝑦෤ + 𝑢 + 𝜋 − 𝜋෤ 2 (15)
𝑎 2
2 2
• With a binding commitment to low inflation,  = a; the loss
function becomes:
1 𝜃
𝐿 = 𝑦𝐿 − 𝑦෤ + 𝑢 + 𝜋 − 𝜋෤ 2
2
2 2
• The value of  that minimizes the expected value of L:
𝜕𝐿
= 𝜃 𝜋 − 𝜋෤ = 0; 𝜋 = 𝜋෤ (16)
𝜕𝜋
La inflación será igual a la deseada
• Under discretion, policymakers take expected inflation as
given (la inflación resultante de su política no tiene porque
coincidir con la deseada); the first-order condition for
minimizing the expected value of their loss function (15) with
respect to  is:
𝜕𝐿
= 𝛼 𝑦𝐿 + 𝛼 𝜋 − 𝜋 𝑎 − 𝑦෤ + 𝜃 𝜋 − 𝜋෤ = 0 88
𝜕𝜋
Which yields:  (~y - y )  2 (  a - ~ )

  ~  L

  2
  2
 In equilibrium,  = a then:
 (~y - y )
  ~  L
 (17)
 En ambos casos (biding & discretion), in equilibrium, output can
deviate from its capacity level only as a result of random
shocks:
y = yL + u
Under discretion, the equilibrium inflation rate will be higher
than desired inflation, because agents understand the
policymakers’ incentive to depart from a policy of low inflation
once expectations are former.
La inflación será mayor cuanto mayor sea (𝑦෤ − 𝑦𝐿 ), mayor sea la
pendiente de la curva de Phillips (α), y menor sea la
89
importancia relativa de la inflación en la función de pérdida (θ).
 Credible commitment to low inflation is welfare
enhancing (ganancia) compared with a
discretionary policy (policy makers take inflation
as given).
 If policymakers can credibly commit themselves

to low (or no) inflation, the economy will be
better off; output will be the same as in the
discretionary policy case (y = yL + u) but inflation will
be lower (  ~ ).
90
6.2 Nominal Anchors in Disinflation:
Money vs. the Exchange Rate
6.2.1 Controllability and Effectiveness.

6.2.2 Adjustment Paths and Relative Costs.
6.2.3 Credibility, Fiscal Commitments, and Flexibility.
6.2.4 The Flexibilization Stage.
91
6.2 Nominal Anchors in Disinflation:
Money vs. the Exchange Rate
Two alternative approaches to inflation stabilization:
 exchange-rate-based stabilization targets,
 money (or credit) growth targets.
 When information is complete and no distortions or

rigidities are present, both are equivalent policies under
perfect capital mobility.
 Fischer (1986): when there are multiperiod nominal contracts,
exchange-rate targets dominate monetary targets under
some configurations of the underlying parameters.
 Agénor and Montiel (1999): under imperfect capital mobility,
disinflation through a reduction in the nominal devaluation
rate or a fall in the rate of growth of domestic credit are not
equivalent.
Choice between the exchange rate and the money supply as
a nominal anchor depends on three main considerations:
1. degree of controllability and the effectiveness of the
instrument in bringing down inflation;
2. adjustment path of the economy and the relative costs
(measured in terms of output losses and lower employment)
associated with each instrument;
3. degree of credibility that each instrument commands, and its
relationship with fiscal policy.
93
6.2.1 Controllability and Effectiveness
 Policymakers cannot control directly the money
supply, but fixing the exchange rate can be done
relatively fast and without substantial costs.
 When money demand is subject to large random
shocks and velocity is unstable, the effectiveness
of the money supply as an anchor is reduced.
 On the other side, an exchange rate peg will
anchor the price level through its direct impact on
prices of tradables.
 So fixing the exchange rate rather than the money
stock may appear preferable.
94
6.2.1 Controllability and Effectiveness
 Because a pegged rate is a monitorable target it may
bolster (reforzar) the government's commitment to the
stabilization effort and help to move new low-inflation
equilibrium (Bruno, 1991).
 Por otro lado, policymakers must be able to convince

private agents that they are willing and able to defend the
fixed exchange rate.
 But it may be difficult to achieve if the current account
deficit is large or if official reserves are relatively low.
 In this case, speculative attacks may occur, eventually
forcing the abandon of the fixed exchange rate.
95
6.2.2 Adjustment paths and relative costs
 The dynamic adjustment paths of the economy associated with
money-based and exchange-rate-based stabilization programs
differ significantly.
Calvo and Végh (1993) model:
 Exchange-rate-based stabilization programs lead to an initial
expansion and a recession later on (boom-recession cycle)
y es especiamente marcado en ajustes where credibility of the
stabilization program is low and perceived as temporary.
 Agents, to take advantage of temporarily low prices of tradable goods,
increase spending. The resulting Current Account deficit and real
exchange appreciation eventually undermine the program and validate
expectations, forcing the authorities to abandon the attempt to fix the
exchange rate.
 Money-based programs cause initial contraction in output
 Una contracción de la oferta monetaria no lleva a un cambio
intertemporal del gasto, no pudiéndose anticipar una crisis de divisas.
 Nevertheless, Reinhart and Végh (1995) and Agénor and
Montiel (1999) find a weak evidence in favor of large
intertemporal substitution effects (exchange rate based
stabilization programs).
Deben existir otros mecanismos de afectación de estas 2

variables:
• Interactions between monetary and supply-side factors.
Roldós (1995, 1997), Rebelo and Vegh (1997).
• Implications for remonetization de los programas de

establización (tipo de cambio y costo del dinero):
97
A Pegged-exchange rate system provides a convenient way to
Households and enterprises to rebuild their real money
balances after a period of high inflation (for a fall of inflationary
expectations). This increase is satisfied automatically through
the balance of payments, as agents repatriate their capital
held abroad and convert it into domestic currency.
Under Money supply anchor (floating rate system): there is no
automatic mechanism for agents to rebuild their real money
balances, because central bank does not have to purchase
repatriated capital in return for domestic money.
The result is that successful anti-inflation programs under a

money supply target (and floating exchange rates) tend to be
more contractionary than those with pegged exchange rate.
(Fischer, Sahay and Végh (2002). 98
6.2.3 Credibility, Fiscal Commitment and
Flexibility
 The degree of credibility of the money supply and the
exchange rate is important in choosing a nominal anchor.
Credibility depends on:

 policymakers' ability to convey (transmitir) clear signals
about their policy preferences;
 degree of controllability of policy instruments and the
dynamic adjustment path of the economy, as discussed
earlier.
Exchange rate anchor enhances the credibility for:

 Public observability of the exchange rate as opposed to
monetary and credit aggregates.
 It may induce a higher commitment to undertake stabilization
99
measures: en concreto fiscal adjustment.
6.2.3 Credibility, Fiscal Commitment and Flexibility
 But residual inflation in home goods prices may remain high
combined with the expansion of aggregate demand, it may
lead to a real appreciation. This immediately weakens the
credibility.
 An exchange-rate rule is, however, more successful in
reducing inflation if there is some degree of credibility;
Money-based stabilization by an immediate recession may

lose credibility rapidly, if the short-term output and
employment cost is high.
When lack of credibility is pervasive, the choice between

money and the exchange rate may not matter; inflation will
remain high regardless of the anchor.
If there are doubts about the government's commitment to fiscal
100
restraint, an exchange rate peg would also lack credibility.
 Végh (1992): analyzes ten exchange-rate-based
programs aimed at stopping high chronic inflation (9
in América Latina and 1 in Israel).
 Seven of them were failures:
 Two cases: failure was due to real appreciation
of the currency following slow convergence of

inflation, in spite of achieving fiscal balance.
 Remaining five: failure to implement a lasting
fiscal adjustment was the main factor.
101
6.2.4 Flexibilization stage
 Although a pegged exchange rate is beneficial in stopping high
inflation, maintaining it for too long can become problematic
once inflation has stabilized at moderate (but not low) rates.
 With fixed nominal exchange rate, continued inflation higher
than that prevailing in trading partners implies an appreciation of
the real exchange rate erode external competitiveness and
hinder export.
 Deteriorating trade performance may force the authorities to
depreciate the exchange rate and reignite inflationary
pressures.
 Shift toward a more flexible exchange rate regime once
macroeconomic stability is achieved, is important to adjust to
internal and external shocks.
 Reduced commitment to low inflation must be renewed by fiscal
102
and monetary discipline to maintain credibility.
6.3 Disinflation Programs:
The Role of Credibility
6.3.1 Sources of Credibility Problems.

6.3.2 Enhancing Credibility.
 Big Bang and Gradualism.
 Central Bank Independence.
 Price Controls.
 Aid as a Commitment Mechanism.
103
6.3.1 Sources of credibility problems
Four different sources of credibility problems in disinflation
programs:
1. Inconsistency between the objective of disinflation and the
policy instruments to achieve this objective, or sequencing
of policy measures in a reform program.
 Por ejemplo, si la fuente principal de inflación es un déficit fiscal elevado
y una expansión de la oferta monetaria, un programa que no especifique
como se va a restaurar la disciplina fiscal tendrá problemas de
credibilidad.
2. Uncertainty associated with the policy environment and
exogenous shocks.
La economía puede ser golpeada por shocks suficientemente grandes como
para echar a bajo incluso programas de estabilización bien diseñados. En
ausencia de mecanismos de contingencia ante estos shocks, la credibilidad
del esfuerzo estabilizador se verá afectada.
104
3. Time inconsistency of policy announcements: program that is
optimal ex ante may not be ex post (possible trade-off
between disinflation and other economic goals). It leads to an
inflation bias in monetary policy.
4. Incomplete or asymmetric information about policymakers'
preferences (los agentes no saben cuan fuerte es su
compromiso).
Over time private agents will come to believe that policymakers

are serious about their policy goal (learning process).
 If policymakers have a long tradition of stop-and-go policies
and the rotation of policymakers in office tends to be high,
learning process will be slow.
 Imperfect monitoring capability makes building reputation
by policymakers more difficult; private agents may learn only
gradually, through a backward-induction process. 105
6.3.2 Enhancing credibility
Enhancing the degree of credibility of a disinflation program
raises the probability of success.
Credibility is easier to establish in the case of hyperinflation
(Kiguel and Liviatan 1993b).
In chronic inflation countries, where inertial mechanisms
(indexación) are well developed, the private agents view
disinflation programs as postponables, and thus less credible.
Four ways of enhancing credibility:

 adoption of a drastic (big bang) program as a way to signal
the policymaker's commitment to disinflation;
 central bank independence;
 imposition of price controls;
 conditional foreign assistance. 106
Big bang and gradualism
 Overadjustment (políticas fiscales y monetarias duras) as a
means to signal to skeptical agents the policymakers'
commitment to inflation stabilization.
 Easier to implement in countries where a new government
with a broad anti-inflation mandate is just being put in place.
 Although initial costs of a big bang program is high, it may
be less than the costs of inflation continuing at a higher level for
a long period of time.
 Sin embargo, cuando se adoptan políticas que desfinancian el

presupuesto, en vez de disminuir los problemas de credibilidad,
los aumentan, because it may create expectations of future
policy reversals.
 In such conditions, enhancing the credibility may require to
implement politically and economically sustainable measures
107
instead of shock therapy.
Central bank independence
 Un mecanismo institucional que puede aumentar la
credibilidad del gobierno es garantizar que el banco central
sea totalmente independiente en su política monetaria y de
tipo de cambio, con un claro mandato para mantener la
estabilidad de precios.
 Independence may be critical in countries where central bank
financing of government budget deficits is often the main source of
inflation.
Factors that may reduce the credibility gain by central
bank independence:
1. Legal independence does not guarantee the absence of
freedom from political interference and pressure on the
central bank's policy decisions.
2. Blackburn and Christensen (1989): even an independent
central bank may be willing to make concessions to the 108
government in order to retain its autonomy.
3. Adhering to a rigid anti-inflation policy stance
implemented by an independent central bank
may be suboptimal in an economy subject to
adverse economic shocks.
4. Credibility of monetary policy may depend on
the overall stance of macroeconomic policy,
rather than on the degree of central bank
independence per se.
5. Independent monetary and fiscal authorities
may adopt policies that generate coordination
problems and costs that may outweigh the gain
resulting from central bank autonomy alone.
109
 Cukierman (1992) hace una revisión de la literatura enfocada
principalmente en países industriales concluyendo que en
aquellos países con mayor grado de autonomía del banco
central son los que tuvieron una tasa de inflación más baja.
 Forder (1998) no robust association between central bank
independence and inflation performance in industrial countries.
 Sikken and De Haan (1998) and De Haan and Kooi (2000) for
developing countries are also inconclusive.
 Sikken and de Haan (1998): no evidence that central bank
independence creates an incentive for governments to maintain low
fiscal deficits.
 Berger, De Hann and Eijffinger (2001) and Brumm (2002)
find strong negative relationship between central bank
independence and inflation. 110
Price controls
 Case when inflationary process is characterized by
substantial inertia, stemming from explicit or implicit
indexation.
 This is a common feature of economies suffering from
chronically high inflation.
 Arguments in favor of temporary price controls (Dornbusch,
Sturzenegger, and Wolf , 1990):
 Realignment device: when pricing decisions are not
instantaneous, price controls may help realign prices

quickly and correct price distortions.
 Coordination device: price controls help coordinate
expectations toward a low inflation path.

 Fiscal device: Reverse Olivera-Tanzi effect: transition from
high to low inflation yields an immediate gain in real revenue

from taxation. Lower the borrowing needs of the government
111
from the central bank.
 Price controls may help enhance credibility by serving as
an additional nominal anchor.
 Blejer and Liviatan (1987): price controls may give
policymakers some breathing room.
 Persson and van Wijnbergen (1993): price controls may
help policymakers to reduce the cost of signaling their
commitment to low inflation.
Example of successful temporary application of price

controls: Israeli stabilization of 1985 (Bruno, 1991, Kiguel
and Liviatan, 1992).
 All nominal variables, including the exchange rate, were
frozen.
 Combined with a sharp fiscal contraction and a restrictive
monetary policy, price controls led to a quick reduction in
inflation and enhanced government credibility, without a
severe economic contraction. 112
Criticism of price controls:
1. Use of price controls may be counterproductive because
they do not enable the public to learn whether inflation has
really been stopped.
2. Credibility-enhancing effect of price controls may vanish if
policymakers are unwilling or unable to control all
prices in the economy (Agénor, 1995).
 In this case price controls may lead to inflation inertia.
Problems at the practical level:

 Price controls have often been used as a substitute, rather
than a complement to fiscal and monetary adjustment.
 Repeated use of price controls diminished their
effectiveness, as economic agents anticipated the price
increases that would follow the flexibilization stage.
113
Aid as a commitment mechanism
 Enhance credibility and the probability of program success
by subjecting to an external enforcement agency whose
commitment to low inflation is well established (e.g. IMF).
 They provide foreign assistance conditional on attaining
specific macroeconomic policy targets.
 Several difficulties arise in judging the credibility-
enhancing effect of foreign assistance:
 Political considerations often play a role in deciding
whether particular countries should receive external
financial assistance support.
 Conditionality is a double-edged sword. If the degree of
conditionality attached to foreign aid is perceived to be
excessive, uncertainty about external support may rise
(Orphanides, 1996). 114
NO EXPLICADO
115
Two Recent stabilization Experiments
 Egypt, 1992-97
 Uganda, 1987-95
 Egypt: exchange-rate-based stabilization.
 Uganda: money-based approach.
 Both show the role of fiscal adjustment in
stabilization programs.
116
Egypt, 1992-97
Macroeconomic imbalances faced by Egypt
(Figure 6.7):
 Although inflation was not high, the fiscal deficit and
money growth rate were high.

 Dollarization ratio (share of foreign currency deposits
in total bank deposits) grew to about 46% in 1990.

 Depreciation of about 30% between 1986 and 1991 of
the real effective exchange rate.

 Current account deficit reached about 10% in 1990/91.
 Gross external debt increased to 147% of GDP during
the period 1988/89-1990/91.

117
Figure 5.7a
Egypt: Macroeconomic Indicators, 1987-96
(In percent per annum, unless otherwise indicated)
7 Real GDP growth zil

ra
B
Money, credit, and prices
6
30
Domestic credit growth
5
Broad money growth
4
20
Inflation
3
2
10
0
0
1988 1990 1992 1994 1996
1988 1990 1992 1994 1996
Source: International Monetary Fund.
118
Figure 5.7b
5 Current account (in % GDP) 60

Dollarization ratio 2/
(in percent)
50
40
-5 30
20
-10
Overall fiscal balance, exc. official grants (in % GDP) 10
-15 0
1988 1990 1992 1994 1996 1988 1990 1992 1994 1996
2/ U.S. dollar deposits in percent of total deposits.

119
Figure 5.7c
35 130
Total debt service/exports of goods and services
Nominal effective exchange rate 3/
120
30
110
25
100
20 Total debt service/GNP
90
15
80
Real effective exchange rate 3/
10 70
5 60
50
0
1988 1990 1992 1994 1996
1988 1990 1992 1994 1996
3/ 1990=100; a rise is a depreciation.
120
 Program of macroeconomic stabilization and
structural reform was implemented in 1991.
Key features:
 combination of fiscal, monetary, and credit policies
together with an exchange rate anchor policy which
was viewed as a way of:
 signaling the government's commitment to
disinflate;
 limiting pass-through effects of nominal
exchange rate changes on prices.
121
Substantial adjustment of fiscal accounts
through:
 general sales tax was introduced and a global
income tax reform was implemented;
 domestic-currency value of oil revenues and Suez
Canal receipts as well as taxes on imports
increased;
 cuts in public expenditure;
 debt forgiveness and rescheduling agreement.
122
Results:
 overall deficit of the government declined sharply;
 primary fiscal balance of the government improved;
 gross domestic public debt fell;
 sharp reduction in broad money growth;
 rate of inflation declined;
 improvement in external accounts and a substantial
accumulation of foreign reserves;
 appreciation of real effective exchange rate;
 dollarization ratio fell.
123
 Output cost of disinflation was a short-lived
recession: real GDP growth dropped to 1.1% in
1990/91 but rebounded to 4.6% in 1994/95 and 5%
on average for 1995/96-1996/97.
This reflected two factors:

 Real credit growth to the nongovernment sector
remained positive throughout the stabilization
program.
 Although interest rates were liberalized in early
1991 and jumped to high levels, they went down
very quickly.
124
Key lessons:
 Importance of fiscal adjustment and external
factors.
 Debt reduction and write-offs (amortizaciones de
préstamos) contributed to significantly to fiscal
adjustment and improvements in the country's
external accounts---despite an appreciating real
exchange rate.
 Tighter policies, with a potentially higher output
cost, would have been needed otherwise if the
external constraint had been more severe.
 External assistance played an essential role in
helping the program gain credibility rapidly.
125
Uganda, 1987-95
Economic problems before applying the
program:
 In 1986, per capita GDP was estimated to be at
about 50% below the level of 1970.
 Inflation was high.
 Fixed exchange rate regime led to a significant real
appreciation and a loss of competitiveness.
 Foreign exchange shortages led to a considerable
spread between the official exchange rate and the
parallel market exchange rate.
 Deterioration in terms of trade.
126
 In 1987: structural adjustment package, Economic
Recovery Program, was applied.
 Stabilization took place through a tightening of
monetary and fiscal policies.
 Currency depreciation was accompanied by a
substantial increase in producer prices.
 Import restrictions were removed.
 GDP growth responded quickly to the adjustment
measures (Figure 6.8).
 But inflation remained high.Main factors behind this
result:
 insufficient effort to tighten fiscal policy;
 excessive growth of bank credit to the

127
government.
Figure 5.8a
Uganda: Macroeconomic Indicators, 1987-95 1/
10 Real GDP growth 250
200
8
150 Inflation
6
100 Broad money growth
4
50
2 0
1987 1989 1991 1993 1995 1987 1989 1991 1993 1995
Source: Sharer et al. (1995), International Monetary Fund and World Bank.
1/ Data refer to the fiscal year (July 1-June30) except for exchange rates. 1988, for instance, refers to 1987/88.
128
Figure 5.8b
5 Fiscal balance (in % GDP) 150

Total domestic credit growth
0
100
-5 Government credit growth
50
-10
0
-15 Current account
balance
(in % GDP)
-20 -50
1987 1989 1991 1993 1995 1987 1989 1991 1993 1995
129
Figure 5.8c
120 250
Total debt Nominal effective exchange rate 2/
(in % of GNP)
100
Debt service 200
(in % of exports of
80 goods and services)
150
60
100
40 Real effective exchange rate 2/
50
20
0 0
1987 1989 1991 1993 1995 1987 1989 1991 1993 1995
2/ 1990=100; a rise is a depreciation.
130
 Lack of fiscal adjustment and price stabilization and
an improvement in external accounts reflected:
 maintenance of an overvalued exchange rate;
 difficult external environment.
 Major deterioration in terms of trade during

1987/88 to 1992/93.
 Lack of foreign exchange led to an accumulation of
external arrears and an expansion of parallel
currency markets.
131
Corrective actions during 1989/90 and
1990/91:
 Devaluation took place.
 Government spending was cut, tax revenues
increased.
 Improvement in the fiscal position led to a reduction
in credit expansion and money supply growth.
 As a result, inflation dropped.
 Liberalizing domestic prices and the exchange
system led to production of noncoffee products.
 Current account improved.
 But inflation increased again because of:
 weather-related supply factors;
132
 renewed pressure on domestic credit growth to
the government.
Fiscal and monetary discipline returned during
the period 1992/93 to 1994/95:
 strict expenditure control was accompanied with
revenue measures and improved tax administration;
 foreign exchange market was unified with the
introduction of an interbank market;
 restrictions on current international transactions
were eliminated; this led to strong investment
incentives to exporters and to large private capital
inflows.
133
Result:
 prices actually fell;
 foreign exchange market was further liberalized;
 real output growth increased;
 external current account deficit fell.
134
Key results of Egypt and Uganda experiences:
 Fiscal adjustment played a key role.
 This led to maintenance of money supply and
taming of inflation.
 Without a significant reduction in fiscal imbalances,
stabilization cannot last regardless of the anchor
chosen.
135
Other results:
 Composition of fiscal adjustment has important
implications for growth.
 Importance of whether the fiscal deficit is reduced
by cutting unproductive expenditure or by raising a
tax is that high rates of taxation levied on a narrow
tax base foster tax evasion and may lead to an
informal economy, exacerbating fiscal constraints
in the longer run.
136
NO EXPLICADO
Figure 6.5a
Malawi: Parallel Market Exchange Rate and Inflation
(In percent)
Depreciation rate of the parallel exchange rate Inflation
60 Malawi
50
40
30
20
10
0
-10
-20
-30
-40
Jan81 Jan84 Jan87 Jan90 Jan93
Sources: International Monetary Fund.
137
NO EXPLICADO
Figure 5.5b
Morocco: Parallel Market Exchange Rate and Inflation
(In percent)
60 Morocco
50
40
30
20
10
0
-10
-20

138
NO EXPLICADO
Figure 5.5c
Nigeia: Parallel Market Exchange Rate and Inflation
(In percent)
300 Nigeria
250
200
150
100
50
-50

139
Agénor and Taylor (1992): two methods for
assessing the relative importance of the various
sources of lack of credibility.
1. Specify a model of the inflationary process in
which lagged inflation appears and estimate it with
recursive least-squares techniques:
 changes in the behavior of the coefficient of the
lagged inflation rate (inertia or persistence) can be
used to assess changes in the degree of credibility;
 increased credibility will translate into a lower
coefficient.
 Edwards (1995) utiliza este método para valorar la
credibilidad de la política macroeconómica en
Venezuela.
140
2. Study of changes over time (posiblemente
también a través de Mínimos Cuadrados
recursivos) in the behavior of the coefficient of a
variable measuring the opportunity cost of
holding domestic money por ejemplo a través de
la tasa de inflación esperada (often proxied by the
lagged actual inflation rate), la tasa de interés
doméstica o la tasa de depreciación del tipo de
cambio, en un modelo de regresión de demanda
de dinero.
 The assumption is: increased credibility will
translate into a lower degree of persistence in the

inflationary process and in a shift toward
domestic-currency-denominated assets.
141
Un error común:
 “La inflación reduce los salarios reales”
 Esto ocurre sólo en el corto plazo, dónde el

salario nominal es fijo por contrato.
 En el largo plazo, el salario real es determinado

por la oferta de dinero y el producto marginal de
trabajo, y no por el nivel de precios o tasa de
inflación.
142
INFLACION Y TASAS NOMINALES DE INTERES.
143
INFLACION Y TASAS NOMINALES DE INTERES.
Que pasa con la tasa de interés real?
144
INFLACION Y TASA DE INTERES
 ECUACION DE FISHER
dónde π es la tasa de inflación y r
 i=r+π es la tasa real de interés e i la
tasa de interés nominal.
 r=i–π
 EFECTO FISHER: un incremento de 1% en la tasa de inflación produce
un incremento en 1% en la tasa nominal de interés.
 EX ANTE Y EX POST CON INFLACION OBSERVADA E INFLACION

ESPERADA: Cuando un deudor y un acreedor coinciden en la tasa
nominal de interés, no conocen cuál será la tasa real de interés al
finalizar el préstamo, entonces realizan una predicción de la tasa de
interés:
Ambas tasas se diferencian
r = i – π  tasa real de interés ex post cuando la inflación efectiva
r = i – πe  tasa real de interés ex ante difiere de la esperada
 EXPRESAMOS EL EFECTO FISHER : i = r + πe 145

Inflación crónica en el ecuador hasta la
dolarización
 La economía ecuatoriana ya estaba dolarizada informalmente, en especial
desde 1995. De acuerdo al FMI, una economía es altamente dolarizada, si
las transacciones de los agentes económicos superan el 30% en dólares.
Año Depósitos Moneda extranjera/ Cartera moneda extranjera/

Depósitos totales % Cartera total %
1989 14,7 1,9
1990 13,3 1,6
1991 14,5 3,0
1992 20,0 6,8
1993 16,9 13,4
1994 15,6 20,3
1995 19,2 28,3
1996 22,3 32,8
1997 23,6 45,1
1998 36,9 60,4
1999 53,7 66,5 146
Causas de la inflación
Otros Factores de Oferta agregada (Δcostos de producción)
 Subidas salariales no relacionadas con la productividad del
factor trabajo (espiral salarios-precios).
 Elevación de impuestos.
 Escasez relativa de un cierto bien.
 Inflación importada: productos comprados al exterior se
encarecen.
 Inflación de beneficios: elevación de los precios de las
empresas para aumentar sus márgenes.
147
Causas de la inflación
Otros Factores que afectan a la demanda agregada:
 Política monetaria (Señoriage) y Depreciación del tipo de cambio
18% 6%
CPI inflation Exchange J
16% CH
GR 4% rate
A
P depreciation D
14%
2% NL
12% DEN B
0% SFN FR
10% I E
UK N
IRL CDN
8% E AUS
AUS
-2% IRL NZL
DEN SFN
FR N I
6% CDN
B A NL -4%
USA J NZL
4% D
CH P
2% -6%
M1 growth rate GR Inflation differential
0% -8%
0% 5% 10% 15% 20% -10% -5% 0% 5%
Money, inflation and the nominal exchange rate in the long run: OECD countries, 1970-1998
148
149
http://www.inec.gob.ec/estadisticas/index.php?option=com_remository&Itemid=&fun
c=startdown&id=373&lang=es&TB_iframe=true&height=250&width=800
¿Cómo se calcula la inflación?
de este proceso, se obtiene la matriz de índices por artículos
http://www.inec.gob.ec/estadisticas/index.php?option=com_remository&Itemid=&func=startdown&id=373&lang=es&TB_iframe=true&
height=250&width=800 150
Matriz de índices por artículo en Ecuador
El IPC se calcula como la
suma ponderada de
los índices por artículo:
La inflación es la variación
relativa del IPC, entre el
tiempo t-1 y el tiempo t:
 IPC2010  IPC2009 
Inflación2010    100
 IPC2009 
299 artículos
151

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Chapter 6

Inflation and Disinflation

Deflación Evolución de la variación de

Cuando la inflación es positiva y decreciente se

Cuando la inflación no es esperada

increase in money demand has

 Esta ecuación nos define una simple estructura de costos de la

 Una variante utilizada en diversos trabajos (ej. Thirlwall 1989).

 En 1958, William Phillips publicó un estudio sobre el

Price Adjustment Function

Esta ecuación indica que los

u – u*, se llama brecha del 33

Source: Bureau of Labor

A flat trade-off curve is shown for

 The slope coefficient on the output gap is γ /1-β ; since

 the long-run trade-off by substituting the long-run condition (π =

The long-run trade-

by the Central Bank.

become indexed to a foreign currency. Transactions are

Aurora del Álamo

Inflation and Money Growth

Source: Beaugrand (1997).

Inflation and Exchange Rate Depreciation

Zaïres per U.S. dollar (parallel market)

Source: Beaugrand (1997).

Banco Central del Ecuador

 Sort term Equilibrium of the money market:

dA: autonomous component of the deficit;

 Deficit must be financed by seigniorage revenue:

m = M/P is the real money balances.

 DD represents only a steady–state relationship between m

 one equilibrium, corresponding to curve D´D´;

 no equilibrium, corresponding to curve D´´D´´.

Whether the long-run equilibrium is unique depends

At any time the economy is located along MM (short

D' (d A=d Am)

 when inflation begins to rise from 0 (∆), real money balances

 Uniqueness occurs only at the optimal inflation rate, max:

 When  < max, increases in  raise revenue from the inflation

La tasa de inflación óptima esta inversamente relacionada con

 Suppose that the economy’s initial position is at point F on

MM. For a given level of . 62

The dynamics move toward point B’.

A la izquierda de B las fuerzas son como en C, por tanto el punto asociado

nominal money stock), because both affect the position of the

 Figure 6.3: positive correlation between inflation and

case, which suggests that the relationship between inflation

Source: World Bank.

Broad money growth

Source: World Bank.

IPM= índice de precios mayoristas 71

Hoang Khieu Van (2014) analiza la relación entre déficit

En lo que si parece que hay consenso es en la relación entre ∆M e ∆π

 Exchange rates and the terms of trade.

 The frequency of price adjustment.

 Time inconsistency and the inflation bias.

Model: economy produces home goods and tradable goods.

in prices of both categories of goods:

 = N + (1 - ) ( + T*) 0 <  < 1, (9)

: share of home goods in the price index,

 En equilibrio, (el exceso de demanda dN=0) 𝜋𝑁 = 𝑤ሶ

 Nominal wage growth is determined through

 = -1+ dN + (1 - )( + T*), (12)

of imported final goods as well as imported inputs. This